Sunday, January 2, 2011

How to finance the project

Scott Shane offers 4 key lessons on entrepreneurial finance

In short, unless you have a rare, super-high-growth business with plans to exit through an initial public offering or acquisition within five to seven years, your best bet is to minimize your capital needs and finance your start-up with your own money, money that you borrow personally, and trade credit.

1. For most entrepreneurs, seeking outside financing isn’t worth your time. 

2. Your personal credit and personal collateral matter a great deal when financing a startup.  

3. You are more likely to get a loan than an equity investment from an outsider. Because venture capital and angel investments are sexier than bank loans and trade credit, the former gets the lion’s share of attention in books and articles about entrepreneurial finance.  However, most of the companies that get outside financing obtain debt, not equity.
Only a tiny percentage of startups are financed by selling equity to accredited angels or venture capitalists.  The statistics show that around 1 percent of companies get their financing from these two sources combined.  Other informal investors – like friends, family and unaccredited angels – add a few percentage points to the share of businesses that get outside equity, but research shows that these sources are actually more likely to lend money than to take an equity stake.  Therefore, unless your business is the type that angels and venture capitalists look for, you shouldn’t waste your time seeking equity investors.
4. Tapping trade creditors is where your odds of obtaining financing for the business itself are highest. According to analysis of the Federal Reserve’s Survey of Small Business Finance, next to having a checking account, trade credit is the most common financial tool used by small businesses.  Because trade credit is offered by suppliers to help you buy their products, even the newest businesses can obtain it.