Choosing the appropriate form of financing for your business venture is important for meeting your goals in a timely manner and reducing any unnecessary financial stress. Addionally, some sources of funding are not available to certain ventures. If you are franchising, for example, seeking investment from a venture capitalist (VC) will prove to be a waste of time because they do not fund these types of businesses. If you are starting your own company, you are not likely to secure an initial bank loan because your business does not have a proven track record. This route will also be less cost effective for you in your bootstrapping years.
The process of funding your business can be complex, but having an understanding of the different characteristics associated with each source of funding will help greatly. There are also programs and resources available to you throughout this process. NMEDD’s Finance Development Team (FDT) employs experts to help you along the way. Team members work alongside New Mexico companies, ranging from technology businesses to retail operations, introducing them to the sources of financing and programs that fit their needs. They will assist in reviewing company’s financial statements, advisement on the appropriate sources of funding, and consulting in other aspects of doing business.
Equity financing allows both public and private companies to raise money by selling a percentage of their company’s equity in exchange for funds. Venture capitalists (VC), angel investors, friends, family, and business partners can participate in funding a company. The requirements for use and return of the funds varies from case to case, but equity financiers generally want to see a high return on their investment (between 50% and 80%) within 3 to 5 years.
Angel investors fund businesses usually in the earliest stages of financing. Their investments rarely reach over $1 million and they are usually bought out of the company between 3 and 5 years. They will expect an ROI, but it is generally less than that expected of VCs. Angels are wealthy people, usually successful entrepreneurs, who want to help those just starting out. Angel investors sometimes have firms or they can be found independently. You can access our database for a list of tax credits or contact our Finance Development Team.
VCs tend to fund startup companies or small businesses needing funds for growth. If your company is expected to be characterized by high growth, you will likely be an attractive investment for a VC. When VCs invest in a company, they usually have some experience in the field in which the business is operating and can offer assistance in getting the business off the ground, they like the technology being used, and/or they believe in the team’s ability to meet goals and grow the company. A VC investment is usually between $1 - $3 million. Sometimes VCs will want to take a large equity portion of the company so they have more decision-making power. They will also likely want a 60% or higher ROI.
Taking investment from a VC is a serious long-term decision that must be handled with diligent research and many in-depth conversations. Some VC firms specialize in certain industries so it is important to do research to make sure you will be a good fit in their portfolio. It is also a good idea to research the reputations of the VCs you are considering so that there are as few surprises as possible. This will likely be a long-lasting relationship. They will become your partners and you want to make sure that the arrangement is going to be mutually beneficial. You can access our database for a list of VCs or contact our Finance Development Team.
Debt financing consists of traditional bank loans, credit cards, or any other form of debt that must be repaid. Because the concept of borrowing money is straightforward, we will briefly discuss some forms of debt financing that are fairly unique: micro lending and government sources of financing.
Business credit cards can be a valuable financial tool for small businesses and sole proprietors because of the reward and cash back programs they offer. These programs often offer 1 point per dollar for any purchase made, and 2 – 5 points for purchases made in certain categories. Categories for each card may vary but they are often tailored to those frequently used by businesses, such as office stores, gas stations, travel, etc. Conditions on redeeming these reward points will vary, but they can be used to purchase plane tickets or other goods through the program’s rewards store. Many times, card holders will be able to convert reward points into cash.
These incentives make everyday purchases and some financing activities more cost effective for business owners. There are a variety of credit cards from which to choose and it is important to research the conditions and benefits of each card before signing up. The Simple Dollar has compiled a list of the best credit cards of 2015 that details the conditions and benefits of several credit cards, including rewards programs and annual fees.
Micro loans range in size from a few hundred dollars to several thousand. These loans are great for those who are starting a business that does not require heavy initial investment. Some micro lenders will loan to established businesses for growth purposes. Micro loans can also open financial opportunities for those who have no or poor credit, limited experience, or little collateral. Interest rates on micro loans range from 3% - 16% depending on the borrower and the terms range from 3 - 24 months. Please see our database or contact our Finance Development Team for more information and a list of micro lenders.
In addition to the many services the SBA provides for entrepreneurs, they also offer small business loans called 7(a) loans for up to $5 million. Small loan offerings include:
Please see our database or contact our Finance Development Team for more information on government sources of financing.
New Market Tax Credits are designed to assist low income communities, including tribal areas with high levels of unemployment and poverty, develop businesses that provide economic development and jobs. The credit is taken over a 7 year period, 5% in each of the first 3 years, and 6% in each of the final 4 years for a total of 39% of the original investment amount. For more information on this program, contact our Finance Development Team.