web analytics
Your Independent Alternative!

Big Question: How To Fund Your Venture?

The entrepreneur plowed through his savings as well as cash from his mother, father, sister, uncle and mother-in-law to launch a barber shop. When he needed even more cash to complete construction of his downtown New York City outpost, he and his wife sold her 5-year-old engagement ring.

The 2-carat princess-cut ring fetched $9,000, which helped launch The New York Shaving Co. in 2008.

"Thank God it was a nice ring," Scala says.

Such a scramble for start-up capital is not uncommon.

Budding entrepreneurs often face tough financial decisions, such as getting a loan that charges interest, trading a company stake for cash or selling valued assets such as an engagement ring or stock to fund their ventures.

No iron-clad fundraising rules exist, because each circumstance is different, says Raman Chadha, executive director of the Coleman Entrepreneurship Center at DePaul University in Chicago.

Money-raising techniques depend not only on the type of firm being started but also on the personal situation of the entrepreneur launching the business. For example, a single, 28-year-old may be able to take on more financial risk than a 38-year-old who has a family to support and a mortgage to pay, Chadha says.

His advice: tap into local entrepreneur groups and universities to research funding opportunities.

Veeral Rathod says research, networking with peers and soliciting advice from successful entrepreneurs helped him and partner Hil Davis successfully raise capital for their men's clothing company in Dallas, J. Hilburn.

The initial cash infusion came from each founder's savings and from family and friends. The specialty high-end-shirt maker launched in 2007.

"A year into the business, we realized that we had something that was working, but it was severely underfunded," Rathod says. "We thought, 'We could go to friends and family, or we could go the institutional direction.' "

The partners, who each have finance backgrounds, went institutional by talking up formalized investment groups such as angel investors and venture capitalists.

The final take: $4.25 million.

Rathod says the duo received one rejection letter after another from potential investors, but they kept plugging away. "Don't get discouraged," says Rathod to other new business owners. "Believe in what you are doing."

Some more-popular financing choices:

Savings. Sara Blakely, founder of hosiery empire Spanx, used her entire savings account - $5,000 - to launch her company in 1998. The payoff is that she owns 100% of Spanx, which took in about $350 million in retail sales last year.

"The return on my money has been incredible," she says. Blakely's bet turned out extremely well. But she had backup income, as she was still working when she launched Spanx.

Those who aren't working at launch time should save money as a cushion for personal expenses, says Ann Dugan, founder of the Institute for Entrepreneurial Excellence at the University of Pittsburgh.

Friends and family. This can be an economical way to start a business, especially if a loan can be had at a low interest rate. But proceed with caution. "A lot of people can't pay them back, and that can affect their relationship," Chadha says.

Eric Ryan, who tapped into family members to start the eco-friendly cleaning company Method, says being financially beholden to relatives can be a bit stressful.

"You don't want to show up at the dinner table and have to explain to your grandma about the $10,000 that you lost," he says.

Managing expectations, as well as creating a formal document that details the financing agreement, are two ways to help keep the peace, Chadha says.

Loans. With the credit crunch, bank loans are more difficult to come by. New entrepreneurs should first check with the institution where they do their personal banking to find out about lending options, Dugan says, then research other local banks.

She also suggests going to a community Small Business Development Center or a local Chamber of Commerce to find out about bank options. The Small Business Administration's website, sba.gov, lists national and local resources and also has information about SBA-backed loans.

Credit cards. Credit cards offer quick access to money, but they also often come with the burden of hefty interest rates. Nearly half of small-business owners are paying an interest rate of 15% or higher, according to a National Small Business Association survey this year.

Before using a credit card, do a "sensitivity analysis," Dugan says. "You've got to really do the math and say, 'If I take this out at 15%, what do I have to do every month and every week in sales so I can pay off that 15% as soon as possible?' "

Angel investors. These investors are typically high-net-worth people who allocate part of their investment portfolio to invest in young firms and start-ups, Chadha says. They often offer investment advice as well as money.

"There are some good angel investor networks out there," Dugan says.

But she also says that start-ups have to carefully consider any pending agreements to be sure that the return-on-investment demands aren't too stringent.

Venture capital. This type of funding is generally for more-established companies, Chadha says. They tend to invest bigger sums of money - millions of dollars - and also offer networking connections and operating advice. In exchange, they often take a seat on the company's board and have a say in how the company is run.

1 Responses »

  1. There also are special SBA loans for veterans and their families. Lower documentation and faster turnaround loans up to about $25K.; more documentation for higher loans.