It’s the question that everybody starting a small business asks. Do I need outside funding or can I bootstrap my business. If I do need funding, what kind do I need, and how to I get it?

Most businesses are actually financed by home equity or private savings. Attracting venture capital or angel investors is something that very few businesses will succeed at, though many will definitely try. And unlike investment money, borrowing will depend on collateral and guarantees over business ideas. So first and foremost, take a serious look at your financial situation and your business from a lender or investors  perspective. Be honest with yourself as you look at what sort of financing is feasible for your situation.

How do you know what the right funding is for your business type? In The Right funding for Your Business Type, Tim Berry discusses some funding options and their pros and cons. In a nutshell:

• Venture capital firms want repeat entrepreneurs and businesses with huge growth rates
• Angel investors are a lot like VCs but typically invest smaller amounts
• Commercial banks generally will loan money for working capital or expansion, but not usually to brand-new businesses
• SBA loans are available for various small business situations and populations, but still require collateral
• Friends and family financing can be a good fit, or fraught with problems
• Personal financing is great if you have the money and can put everything on the line.

For more details, read Tim’s full article. Or for another point of view, check out The Four Tiers of Small Business Financing.

Investment image from homepage courtesy of Shutterstock

Getting a big project or business off the ground isn’t easy. There are often  startup costs that can hinder your development and slow progress to a crawl. While the typical solution to this problem is to max out the credit cards, get a loan from the bank, or find a private investor or an investment group, there is an alternative that is much less risky: crowdsourcing.

What is Crowdsourcing?

If you’ve never heard of the term “crowdsourcing” before you’ll be happy to realize that it is a very simple concept. Crowdsourcing is simply the act of outsourcing to a mostly anonymous group of individuals for very little, if any compensation in return. A good example of this would be Wikipedia and other online wikis. These sites have their pages written by anonymous contributors who don’t accept payment for their work. Sounds like a pretty good deal, huh?

You may be wondering, though, why anyone would do something for no compensation in return. The answer is simple, they’re passionate about it. Someone who loves comic books may go to a comics wiki and write about their favorite characters. Someone who’s really into history may write history-based content for wikis. The list goes on and on.

Crowdfunding

You’re probably not interested in starting a wiki if you’re main focus is on funding your online business. The good news is that crowdsourcing can be applied to much more than just online written content, including getting funding for your business. This practice is known as “crowdfunding” and basically constitutes taking donations. Many organizations use this practice, from religious groups to charity funds to scientific research firms.

The only catch is that getting people to participate in crowdfunding isn’t always as easy as putting a “Donate” button on a website and waiting for the money to roll in. While this practice can be useful when you’re doing crowdfunding, you should try more aggressive techniques as well.

Give a Little, Get a lot

In most cases you’re going to have to offer some incentive if you want people to jump on board and help fund your business. One way of doing this is to offer special rewards or gifts to people who contribute a certain amount of money. You could offer free t-shirts, which are really cheap to order in bulk, free office supplies, or a unique item you create yourself.

In any event, you’re probably going to want to give away something that relates to your business. Also consider having your corporate or company logo applied to any merchandise you do give away. This is a powerful branding strategy that will help to build your brand recognition in addition to rewarding loyal donors.

Another tactic is to release a product or reward for the entire community when the amount of money received from donations reaches a certain level. Digital products such as ebooks, a video series, or an MP3 series, are ideal for this since you don’t have to worry about shipping costs, or inventor. Try creating multiple tiers with special rewards being released for each tier.

Kickstarter is perhaps the most recognized crowdfunding platform.  It’s geared toward music, film, art, technology, and other creative fields, and allows users to seek funding from other users and manage their fund raising campaigns.  There are plenty more, with many focusing on particular interest groups.

Dealing With the Haters

There are some people who like to refer to crowdfunding as “e-begging” and will give you hard time over it. However, don’t let this get to you. There is nothing unethical about crowdfunding and no one is forcing anyone to donate to your business. Ignore the haters, collect your money and advance your business.

A good idea to take some of the heat off of you if you’re getting a lot of negative attention from crowdsourcing is to donate a portion of the proceeds to charity. This can be an incentive to get people to donate as well as present your crowdfunding system in a more positive light. Just be sure you actually do give the money to charity that you say you’re going to. Not doing so is illegal.

Sam Mauzy is a blogger and contributing writer for Quick Sprout, a digital marketing agency.

The social web is drastically changing the way young companies get noticed, and getting noticed by the right person or network can mean investment, growth, and ultimately business success.

If you’re not keeping up to date on innovative new ways to find funding for your business, including crowd sourcing and  Internet-based campaigns, you’re missing golden opportunities.

But money doesn’t grow on trees. Find out how to seek funding from outside of traditional sources in a free one hour webinar hosted by MyVenturePad and TriNet. This session is custom-built for business innovators and tech entrepreneurs looking to turn a product into a business.

Bplans’ own Tim Berry will join a group of other experts to discuss:

• Online groups that build and support communities of entrepreneurs
• How mentors help bring products to market
• Classic challenges that impede growth
• How social media networks can reduce financial needs for start-ups
• How to show strong customer traction in the clutter of new companies

The webinar is Wednesday, March 7, at 3 p.m. ET/12 p.m. PT. Did I mention that it’s free? Register now, and let Tim and friends help you find creative new ways to fund your business.

One sad fact in our capitalistic world is that funding for many worthwhile efforts is often difficult to obtain if there is not a direct profit opportunity to be had.  Non-profit’s and local community leaders need special assistance, especially in developing countries, to gain access to appropriate resources of capital devoted to their respective purposes.

Attempting to improve the health, education, and welfare of the impoverished by starting a business designed to support the local need is admirable, but your typical banker is not the one to be approached for a business loan. Most people that follow this route are too often met with the reality of bank lending practices.  Loans cannot be made without collateral, and the security of this collateral must meet high standards set by each individual bank.  If the project fails, the bank wants something to salvage to recover its money.  It also will not lend unless there are “visible” flows of cash to pay back the loan over the loan’s term

If banks will only make a business loan under these conditions, how is a local effort to get funded in the first place?  Most often, if the initiative is not driven by an organization that already has funding, then the effort will require more effort than with a normal startup venture.  There are philanthropic institutions, both charitable and faith based, which are devoted to this purpose.  The difficulty involves approaching the right organization and applying for a grant in the appropriate manner, not an easy task when language and cultural barriers stand in the way.

Local development agencies should be approached first since their reason for being is to assist with projects of a non-profit nature for the good of the regional community.  These groups should also have information and contacts at larger organizations that may not be in the local area.  There are an enormous number of philanthropic groups around the globe that network through many smaller organizations.  If you do not meet success at the first one contacted, they may connect you with a group that will be eager to help.  Here are a few examples of these larger groups:

• The Africa Grantmakers’ Affinity Group (AGAG) is a membership organization of foundations that either fund or are interested in funding in Africa.  AGAG has its roots in the South Africa.  These influential managers are instrumental in sharing and learning the most effective ways to support development efforts in Africa.
• The African Women’s Development Fund (AWDF) is a fund-raising and grant-making initiative, which aims to support the work of the African Women’s movement.  AWDF, the first Africa-wide fund-raising and grant-making fund, was established in June 2000.
• The U.S. Agency for International Development (USAID) promotes peace and stability by fostering economic growth, protecting human health, providing emergency humanitarian assistance, and enhancing democracy in developing countries.  USAID has working relationships, through contracts and grant agreements, with more than 3,500 companies and over 300 U.S.-based private voluntary organizations.

Tom Cleveland is a writer for SmallBusinessLoansDirect.com.  He has over 30 years of experience in executive management, corporate governance and business development.  Tom served as CFO for various Visa International entities from 1980 until his retirement in 1999 and was instrumental in expanding the global reach of the Visa system.  Tom’s writing on business issues has appeared in the NY Daily News and BusinessInsider among others.

Image via Wikipedia

“I’ve got a great idea for a business, but I don’t have any money to get it started! Where can I get money from the government or find investors to help me start my business?”

If I had a dime for every time I’ve been asked this question, I’d be wealthy enough to establish my own small-business loan company. Almost every person with a start-up business wishes he or she had money—or more money to grow an established business. In fact, many people use their lack of funds as an excuse for not starting or expanding their businesses. Here’s what I tell them: You must not really want to make it happen! Successful entrepreneurs realize there are many ways to bootstrap yourself to success.

One of the most popular ways to find the business funding you need is to ask your family and friends. However, mixing money and relationships can be a recipe for disaster, but it doesn’t have to be that way. The Limited, one of my favorite trendy clothing stores, was started in 1963 by Leslie Wexner, who borrowed $5,000 from his aunt to open a small women’s retail shop called Leslie’s Limited. The Limited now operates in thousands of cities across the United States and boasts revenues in the billions. So there are a number of success stories that involve family/friend financing. However, there are many sad tales as well.

Most of the relationship problems occur because the transactions were handled poorly. Therefore, to avoid a relationship disaster, before seeking funds from family and friends, you have to do the proper preparation—it is vital. You need to approach a family/friend loan as professionally as you would any other source of funding. You need to be prepared with your business plan and a professional presentation. Demonstrate to your potential investors that you have a well-thought-out plan with defensible strategies and projections.

Even before you begin dialing for dollars, make a list of potential investors—people you know, including family, friends, and business associates. At this stage, you don’t worry about whether you think they’ll be interested, you just make the list.

Once you have your list, you can narrow it down. Here are some things to consider:

• Affluence. Can this person afford to lose the money? Remember, there is a high degree of risk involved in investing in a small business, so consider the individual’s financial well-being.
• Business experience. The best investor is someone who understands the entrepreneurial process and can evaluate your business prospects. Often successful entrepreneurs are interested in learning about new ventures and helping new businesses succeed.
• Emotional baggage. Avoid asking someone with whom you have had conflict in the past. A precarious relationship could lead to problems in your business. Additionally, don’t ask someone who may have to deal with repercussions from others in the event he or she loans you money. For example, a spouse who might become angry about the investment could create serious problems, and you don’t need additional issues to deal with when you are trying to get your business off the ground.

Once you have narrowed your list down to the top potential investors, schedule meetings with them to discuss the opportunity. (Don’t ambush them at a cocktail party or family gathering and ask for the cash.) After you meet with them and review your plan, give them time to review the information and think it over. Never put pressure on anyone to make an immediate decision. Ask when would be a good time to follow up.

Be careful about getting your hopes up just because someone agrees to meet with you. People will often say no regardless of their feelings toward you. Don’t take it personally. There may be issues in their lives of which you aren’t aware, and those may make them uncomfortable loaning or investing at this time. Never get angry or make someone feel guilty, and don’t resort to emotional blackmail. Maintain your integrity. Things may change and you never know when you might need to approach someone again in the future.

Image via Wikipedia

Whether you’re just getting started or have been in business for many years, every business at some time or another will need a little outside financial help. Equipment breaks down, you outgrow your space, or maybe you want to invest in infrastructure. Whatever the reason, it’s nice to know you have options when it comes to financing the growth of your business.

When it comes to injecting money into your business, you typically have four options:

1. Cash, either from you personally or from your business
2. Gifted funds from family and friends
3. Investor funds: this is cash in exchange for ownership/portion of net income
4. Borrowed funds

There are pros and cons to each option, and you will need to weigh them against your current situation and your goals in order to determine which option is best for you.

Cash

We all know that cash is king, but in a young business cash may not be as readily available as it is in a mature business. Even if you do have cash on hand, you may not want to rush into spending it without first considering the following:

Pros of using cash:

1. You don’t have to pay interest.
2. You don’t have to give up equity in your company.
3. You don’t have to mess with paperwork or tracking payments.
4. It doesn’t affect your credit.
5. Cash is a liquid asset so you can use it when you need it.

Cons of using cash:

1. Cash typically represents your working capital and is necessary for daily operations and emergency funds. If you deplete your cash too quickly, or just before a bump in the economic road, you may find your financial hands tied.
2. Cash is a scarce resource. It’s quickly depleted and takes time to replace.

Gifted Funds

We love our family and friends. They support us through thick and thin, and it’s great to know we have that network should we need it. However, you may want to think twice before you tap into that network financially.

Pros of using gifted funds:

1. Peer-to-peer lending networks make it easy to tap into family and friends’ financial resources.
2. They require less (and sometimes no) paperwork.
3. They have a vested interest in your success.
4. If you have a vast network you can accumulate enough small donations to reach a sizable injection for your business.

Cons of using gifted funds:

1. Your family and friends may not be able to provide enough money to fit your needs.
2. Informal arrangements have a tendency to backfire, even among family. Monetary obligations can strain some of the most important relationships in your life.
3. You still may have to pay back that money and sometimes with interest.

Investment

Shows like Shark Tank have opened up the public’s eyes to the powerful and nerve-wracking experience of seeking outside investment for a budding company. Just like any option, investors are a double-edged sword and may not be right for every business.

Pros of seeking investors:

1. Investors can provide a quick and often sizable injection to help push you over the hump to that next big level.
2. Investors are keen on making sure their investment was worthwhile, so they will bundle their expertise in the deal, giving you a huge ace in the hole.
3. Investors often take equity or royalty has repayment, which means you can gradually make payments based on the growth of the business rather than adding a large fixed payment to your expenses.

Cons of seeking investors:

1. Investors tend to be focused on product-oriented businesses, so if you have a service-based company you may not be able to get investment.
2. You have to give up equity in your company. Adding another chief to the mix can bog down the decision making process (in some cases) and may compromise your brand vision.

Borrowed funds:

Many businesses in need of funds jump to the lender option first. It’s certainly the most common and most well known option when it comes to securing needed funds.

Pros of borrowed funds:

1. You have choices when it comes to sources of borrowed funds. Traditional banks, government programs, credit unions, micro-lenders, and mezzanine funds all have initiatives to help businesses at all stages of development.
2. You can choose between an open line of credit that you can tap into whenever you need a little extra money, or seek a loan for a specific project or investment.
3. You get to retain complete ownership of your company.

Cons of using borrowed funds:

1. You have to pay interest and make regular payments, which increases your monthly expenses.
2. It’s a long process requiring lots of paperwork.
3. 3. It affects your credit.
4. Often you have to put up collateral. If you default, the bank can take out a lien on vital assets.

Bottom line—there is no one-size-fits-all option for securing additional funds for your business. What’s good for one company isn’t necessarily good for another. Even in your own company you may find that certain sources of funds that are good for you now won’t make sense in the future and vice versa. That’s why it’s so important that, before you jump on one option or the other, you first weigh the pros and cons and decide what’s best for your business now.

The Small Business Administration has announced an all new “Small Loan Advantage and Community Advantage Loan Initiatives”  program.

From the SBA.gov website: “SBA is committed to expanding access to capital for small businesses and entrepreneurs in under-served communities so that we can drive economic growth and job creation.”

The new initiatives promise a smaller application process and faster turn around – from a few minutes to a few days, for SBA 7(a) loans up to $250,000.

Read all the details on www.sba.gov/advantage

The new programs should be live on or around March 15, 2011.

‘Chelle Parmele

Since start-up funding and growth financing for small- and medium-sized businesses has been in such short supply these past couple years, I thought posting about this CNNMoney.com / Fortune Small Business article on finding novel local investment would be a welcome change.

The article, originally published earlier in September, is about owners of several types of small businesses which opened, recovered, or expanded during the current economic crunch because local patrons were willing to invest in their favorite local businesses. Several types of money raising programs are discussed, including VIP cards/treatment for shareholders, $600 store and restaurant certificates sold for $500 (20% is a pretty good ROI), as well as “shares”.

Businesses showcased include restaurants, bookstores, pub/bar, and a fair-trade retail gift store. The focus of these financing efforts is on encouraging customers to become patrons or shareholders. And shareholders are a loyal customer base. Local shareholders feel vested in the company and want you to succeed.

Look to your customer base and your community. Including them as participants in your business and fostering a buy-local awareness could bring you that shot-in-the-arm financial boost to success.

Read the entire Love a local business? Buy a share article.

Steve Lange
Palo Alto Software

I found the following story on several Internet sites.

At New York’s Kennedy airport today, an individual, later discovered to be a public school teacher, was arrested trying to board a flight while in possession of a ruler, a protractor, a set square, and a calculator.

The Attorney General and the Secretary of Homeland Security believe the man is a member of the notorious Al-Gebra movement. He is being charged with carrying weapons of math instruction.

Al-Gebra is a very fearsome cult, indeed. They desire average solutions by means and extremes, and sometimes go off on a tangent in a search of absolute value.

They consist of quite shadowy figures, with names like “x” and “y”, and, although they are frequently referred to as “unknowns”, we know they really belong to a common denominator and are part of the axis of medieval with coordinates in every country.

As the great Greek mathematician Isosceles used to say, there are 3 sides to every triangle, and if God had wanted us to have better weapons of math instruction, He would have given us more fingers and toes.

Therefore, I’m extremely grateful that our government has given us a sine that it is intent on protracting us from these math-dogs who are so willing to disintegrate us with calculus disregard.

These statistic scumbags love to inflict plane on every sphere of influence.

Under the circumferences, it’s time we differentiated their root, made our point, and drew the line. These weapons of math instruction have the potential to decimate everything in their math on a scalene never before seen unless we become exponents of a Higher Power and begin to factor-in random facts of vertex.

As our Great Leader would say, “Read my ellipse.”

Here is one principle he knows with certainty, they continue to multiply, their days are numbered and the hypotenuse will tighten around their necks.

Funny, yes? I think so.

Mark Twain said, “The difference between the right word and the almost-right word is the difference between lightning and the lightning-bug.”

The story above is also a cautionary tale about spell checker software, and the almost-right word. Everything in that story is spelled correctly, but many words are very incorrect in the context of Homeland Security. My spell checker just breezed right on by those.

If you make similar mistakes in the business plan you submit, the bank, the investors, the venture competition judges, or your MBA professors will also get a good laugh … and keep right on chuckling as they send your plan to the Out box.

Proofread your plan. Have someone who wasn’t involved in writing the plan read it over. Implement the edit suggestions you receive.

Steve Lange
Palo Alto Software