Business Financing

There are some basic concepts to business financing that all business owners should be aware of. These include:

• Risk vs. return
• Equity (i.e. stock ownership) vs. debt (i.e. a loan)
• “Smart” money vs. “dumb money”
• “Free money”
• Dilution

What is dilution? Dilution is defined as substantial outside equity investment at early stage of company that will cause loss of control whereas some dollar investment when company is more mature and more valuable might not. In addition, small piece of a big pie is worth more than 100% of marginal company.

Writing a business plan

Why is a written business planning a good idea?

Written business plans are required by most financing sources. Even if outside funds are not being obtained or a friend or relative is providing the funds, a written business plan is a good idea.

What sections should my business plan have?

• Executive summary
• Description of business
• Marketing
• Financial plan/statements
• Management teams

Where can I get help with my business plan?

There are several places to receive help with business planning. The most common are:

• Attorneys and accountants
• SCORE
• SBDC

Business financing options

Personal funds

People who are considering loaning you money or otherwise investing in your business are more likely to do so if they see that you are also investing some of your own funds.

Friends and family

If you borrow from friends and family you run the risk of losing a friend or straining family relationships if there are difficulties with repayment. Friends and families are best to be used in reserve for situations where the friend or family member can afford to lose the money. Read more about our advice about borrowing money from friends and family

Banks (SBA)

The cost of borrowing from a bank is less, but It requires a good credit score, and they will want to see a written business plan. They also typically want 20% of the loan to be financed by you. However, SBA loans through banks can allow banks to take on more risks.

The Champaign County Regional Planning Commission

The Champaign County Regional Commission provides debt and equity financing to qualifying small businesses in Champaign County. However, they have a preference towards capital incentives and/or technology oriented businesses. Business owners are required to create a specific number of full time jobs and they can’t constitute more than fifty percent of the total project investment. The Champaign County Regional Planning Commission works with local banks as well.

Bootstraps

Bootstraps refer to when a company uses its own profits to grow their business. Revenue is defined as all sales from products and revenues from consulting used to support product development. Please keep in mind that this is not possible for some businesses.

Grants

Grants are available only under very limited circumstances. They are typically not available for businesses that fall under the category of retail, restaurants, etc. Grants are considered ‘free money’ but should not be mistaken for ‘easy money.”. Grants do not have to be repaid, however, those who administer the grants typically retain ownership of intellectual property. Business owners should be aware that grants are typically submitted in response to a specific request proposal (RFP) from a government agency, such as, sbinworld.com.

Joint Development Agreements

Big companies interested in small companies’ technologies will ‘give’ smaller companies money and resources to refine products. This may lead to eventual licensing of intellectual property (IP) to the larger companies. However, business owners should be careful with respect to ownership of IP generated under the JDA. Non-disclosure agreements are needed to prevent lawsuits, however, small-business owners should also be aware that bigger companies will have access to superior litigation resources in an event of a dispute.

Angel investors

Angel investors are individuals or groups of individuals who are interested in providing funds to start or grow a company. They may be individuals who have accumulated a certain amount of wealth through the practice of a profession or the sale of a business which they previously started and grew and made successful.

There are three types of angel investors:

1. Smart money: Money that is invested by someone who has experience in your company‟s industry. The investor adds value to the company through management expertise, technical expertise, knowledge of channels of distribution, contacts in the industry, or in other ways. The investor may or may not want to have the ability to have direct input into the company through a board seat or other position.
2. Passive money: Money that comes from individuals who do not have the industry contacts or industry experience described above for “smart money.” Typically, these investors will not seek direct input into the company.
3. Painful money: Money that comes from investors who want to have significant input into the company but do not have any business expertise or contacts in the industry to add value to the company. Angel investors can be found through your knowledge of the industry, personal contacts, or referrals from your attorney or others. There are many legal requirements that structure an angel investment properly to avoid personal liability on the part of the company owners.

Venture capital

Venture capital funding may be available for companies that have the potential for growing very large very quickly. However, venture capital is difficult to obtain, is very costly, and is only available for certain type of business, such as ones that are interested in commercializing a technology. Venture capitalists will seek a very high return on their investment which will reward them for the greater risks they are taking. The level of investment will typically be significant. The venture capital firm will often want significant input into the company, including making sure that there is professional management in place. Venture capital investment can be a good way to grow a company quickly

Venture capital firms with a presence in the Champaign-Urbana area include:

• Illinois Ventures,
• Open Prairie Ventures
• InDecature Ventures, LLC

Bonds

Bonds are debt whereby the issuing company or governmental body promises to pay the bondholders a specific amount of interest for a specific amount of time and to repay principle on a specific expiration date. Bonds can offer a very favorable interest rate with no loss in equity. However, they are only typically feasible for substantial amounts of capital.

Initial Public Offerings

Very few companies go public. Most exit through sale to another company or just operate and then wind down. This is very difficult and expensive to go public, especially in the current market and economy

Attorney roles

Attorneys can assist in identifying appropriate funding sources and preparing a credible presentation to financing sources. They can also help refer first-time business owners to venture capital firms, bankers, and private investors. They can also assist by reviewing and negotiating terms of financing and by making sure business owners understand what they’re signing.