By Rieva Lesonsky
You hear a lot about how difficult it is for small businesses to get financing these days. But the reality is, plenty of companies are still doing it. Although personal savings is the number-one source of financing for small companies, debt in the form of bank loans is close behind, according to The Kauffmann Foundation.
Last year the foundation polled all the companies that have made the Inc. 500 since 1996 to find out where they got their funding. Here’s what they said:
- Personal savings – 67.2 percent
- Bank loans – 51.8 percent
- Credit cards – 34 percent
- Family – 20.9 percent
- Have not used financing- 13.6 percent
- Business acquaintances – 11.9 percent
- Angel investors – 7.7 percent
- Close friends – 7.5 percent
- Venture capitalists – 6.5 percent
- Government grants – 3.8 percent
Kauffmann points out some pros and cons of the various types of funding:
Debt lets you maintain complete control of your business, even though you do have to pay the money back. Equity investors can provide expertise and assistance that go beyond the money they provide. For example, Kauffmann says, VC-backed companies overall have faster sales growth, greater employee growth and higher sales than companies without VC.
On the downside, borrowing money just gives you money—you don’t get access to any expertise or guidance. But taking equity can tie you to investors who may have a different vision for your business, or could even force you out.
While many entrepreneurs are curious about government grants, Kauffmann notes that grants are typically extremely specific, with stringent requirements. For example, in one government grant program, SBIR, more than two-thirds of entrepreneurs receiving the grants were previously academics.
What about crowdfunding? It’s a great way to test your idea in the marketplace by seeing if people are willing to invest in it. However, some entrepreneurs have disclosed too many details of their intellectual property. In addition, since the SEC still hasn’t finalized how equity crowdfunding will be regulated, this type of crowdfunding is not yet fully available to startups.
What do the statistics in the Kauffman report have to tell us? First of all, bank financing is still a viable way to fund your business—perhaps not in the actual startup stages, but during the growth phase. If you consider credit card financing to be bank financing, this can be an option for startup, as long as you are aware of the risks. You need to have a good business plan and well-thought-out financial projections to ensure you can actually make payments on the credit cards and not get into trouble.
Do you need help running the numbers and determining which type of financing is best for your business (or to get your business off the ground)? SCORE and the SBDC are two great organizations that can get you started, provide advice and even help you find local sources of financing—all for free. (Disclosure: SCORE and the LA-SBDC Network are clients of my company).
