What Are The Real Sources Of Business Financing

If you have read Ideas To Deals much or heard me speak on business financing these findings won't surprise you but for the rest of you please take heed. Financing is a process that follows a continuum. The ability to obtain financing flows from funding vehicles available to early stage, high-risk ventures to banks that typically want to deal with established, low-risk businesses. Understanding where you are on this continuum and working the available sources will make you more successful in obtaining capital. 

At the start-up phase, when there is the most risk, where will you be most likely to get capital? The first capital in is from "You" then from the people that know and trust "YOU" the most, friends and family. Friends and family may not even know, or care, anything about the business they just know you and want to help you out. As you move up the continuum the level of due diligence increases. You will need to have a business plan with defensible projections when you speak to investors. You will more than likely need product and early customers to get the attention of venture capitalists. To go to banks you better be able to show that you have a good business now and don't really need money to sustain current levels of growth but if you get this piece of equipment or building (collateral) you can grow to the next level.

Trying to jump levels when you are not ready will, much more often than not, result in failure. So are you just stuck? Not necessarily. What you have to do is try to move yourself as far down the continuum as you can, even if you are not really there yet.

First, you also need to have a business plan. It needs solid, correct assumptions relating to the projections and have the answers to whatever questions someone might ask. This takes work but I have seen a good, well thought out, story make a difference.

Second, you need to be creative and bootstrap yourself to a level of less risk. This is what you see happening in the graph. People using personal saving, credit cards, home equity to build the level of the business before they ask other people for money based on the credibility of the business. 

Third, you need to get paying customers. While you need to think strategically and focus on where you are going and what the future state of revenue and customers will be, you have to live in the present. If you had a million dollars you could build scale quickly and have a lot of customers but if you have limited resources focus on getting the first paying customer then focus on getting the second paying customer and so on. You'll be amazed how much validation paying customers gives you. Also, revenue is the least expensive capital you are going to find.

Finally, don't give up. Being realistic and understanding what it takes to build a business and get funding will allow you to make better decisions and get where you are going faster and stronger.

For more tips on funding and building your small business visit Ideas To Deals.