New entrepreneurs that have never managed an enterprise on their own are often amazed at the amount of time required to fund their latest “idea.” No matter how good the idea, how professional looking the marketing materials, or how convincing the near-term goals may seem, people that have sorely needed capital tend to be conservative and risk-averse. Getting them to listen and then write a check is a rare occurrence when a small business with few customers is involved. Credit risk is at its highest profile, unfortunately, when a small or medium-sized enterprise (“SME”) is concerned.
In an ideal situation, new business ventures would start with permanent investment capital to provide stability and permit the management team to focus on revenue objectives and early-stage development issues. Recent news about the International Finance Corporation (“IFC”), a member of the World Bank Group, investing $20 million in the Pragati India Fund came as a welcomed dose of positive support for fledgling SME’s. The Pragati India Fund will focus on entities outside of major urban centers that are in need of working capital and that can materially impact the creation of new jobs.
Regional development funds and incubators are extremely important vehicles for jump- starting new business ventures. Companies that have already tested their business model and have paying customers, however, will be the primary candidates for the Pragati fund. What funding options will work for the remaining early-stage ventures? In order by increasing difficulty, the following list may guide your early funding efforts:
1) Friends and Family: Unless you are independently wealthy to begin with, you will need to convince someone else to invest in your idea, more than likely in the form of a loan, not permanent capital. If you cannot convince them, why would someone that does not know you loan you money?
2) Grants: There are many government grant funds that are designed to help small companies bridge the gap to becoming fully funded entities. Check the landscape for the possibilities;
3) Secured Debt: A loan that has a security interest in an asset, also known as “collateral”, is the service that a local bank can provide. Banks require collateral and may have very specific rules on how the funds may be used. Even if the bank says “No”, inquire about their “network” of funding partners that may be able to help you;
4) Unsecured Debt: No collateral required, but more risk for an investor. He may demand a high interest rate, in addition to an ownership option for buying shares in your company. The most favored unsecured method for funding a business happens to be a credit card with a large credit limit.
The benefit of unsecured debt or secured debt is that the owner does not have to dilute the control of his operation, but there are limits to the amount of credit available. In many cases, it may be prudent to consolidate existing unsecured and secured debt under one “umbrella” with terms that will not inhibit your raising permanent capital down the road.
Financing your enterprise until it becomes profitable is a major challenge. Debt may work early in the process, but your long-term goal should be acquiring permanent capital to allow you to focus unabated on your dream.