The majority of businesses do not achieve positive cash flow until 24 to 36 months of operation. How you fund your business until it reaches profitability is an important decision that needs to be made prior to launch. Few government programs and grants are available to assist you in this area. Five sources of capital you can consider:
- Friends, Family and Fools (including self funding)
- Bank Financing
- Private Equity Investment
- Strategic Partners
- SBIR/STTR grants.
Friends, Family and Fools (The 3 Fs)
Self-funding or turning to relatives for financial assistance is a common method for financing a new venture. Whether you self-fund the entire business, or a portion of the startup costs, both banks and equity investors look for the entrepreneur to have financial “skin-in-the-game.” If you are unwilling to risk your own financial resources, do not expect banks or investors to be willing to carry the risk alone.Entrepreneurs need to proceed with caution when pursuing the three F’s investment strategy. Aside from the obvious potential social upheaval and risks, make sure to treat any such loan or investment as a business transaction, including a written loan or investment agreement reviewed by an attorney.
Securing bank financing for a new business can be difficult. To maximize your chance of success, start building a relationship with your business banker early and be prepared to provide information on your personal finances and 3-to-5 year financial projections for your new business. The SD Small Business Development Centers, are a great resource for assistance in developing these financial projections. Financing for capital expenditures for equipment, etc. that can be used to secure a loan is often easier to obtain than unsecured financing for other operating expenses. The South Dakota office of the U.S. Small Business Administration (SBA), can provide you information and assistance on accessing its loan guarantee programs. Through these programs, the SBA reduces the bank’s lending risk by guaranteeing a portion of the loan if the borrower goes into default.The South Dakota Governor’s Office of Economic Development (GOED), also oversees several loan programs that can be part of the financing solution for new companies.
Private Equity Investors
Private investors seek a high rate of return for higher-risk business opportunities. Angel Investors are generally first-round investors who often take an active role in growing a company, as well as providing capital. South Dakota also has several active Regional Angel Investor Network (RAIN) funds through which angel investors pool their resources and expertise to assist early-stage companies. The Enterprise Institute actively works to qualify and connect prospects with both individual angel investors and the RAIN funds.The number of venture capital (VC) firms in South Dakota has grown significantly in recent years. There are at least five active VC funds in the Sioux Falls area. Normally, VCs participate in later funding rounds and require that a business already have revenues from the sale of products or services.
Don’t forget about strategic partners as a potential source of financing or funding. Companies that already have a vested interest in your success can also serve as a financing partner.
The Small Business Innovation Research (SBIR) program is one of the few grant programs that exists for small businesses. SBIR provides more than $2 billion annually for high-risk research and product development. SBIR funds do not have to be repaid, and the SBIR does not require the owner to sacrifice equity in the company. Historically, only 15% of SBIR Phase I proposals and only 7% of Phase II proposals are funded. The SD Small Business Development Center has a staff person dedicated to assisting companies in accessing these funds.