Scratching Up Seed Money

Posted on Friday, July 13, 2018

Finding just the right financing to start or expand your company is a complex process that involves uncovering sources of money, using the proper means and evaluating whether the timing is good. If the economy is slow, it's more difficult to raise cash — no matter how clever a business plan you have.

10 Myths About Starting a Business

1."I'm broke, so it's a good time." New ventures drain bank accounts fast, so plan on having at least two year's worth of income in addition to start-up costs, which vary depending on the business. Then, you can devote all your time and energy without having to hold down a job at the same time.

2. "I need a little more practice." Many people start new businesses based on their experience, but it's easy to keep putting it off because you need "more practice." At some point, you have to take the leap from "practicing" to "owning a business."

3. "I hate being told what to do." Like it or not, business owners have lots of bosses — they're called customers.

4. "I'm not renting an office so I don't need much seed money." Make no mistake about it: Even if you're home-based, you need lots of money for supplies, desks, phone service, memberships, license fees, accountants, lawyers, business cards, web designers, consultants and more.

5. "I don't need a business plan." Every business needs a plan, but don't worry about creating the "perfect" one. Life changes and plenty of things steer you off track. Create a flexible plan and review it in six months.

6. "I don't need a marketing plan."  You might have the best product or service in the world, but it won't sell unless people know about it.

7. "My website will bring in lots of business." Cyber-marketing is effective only if your ideal clients are found on the web and you do Internet marketing. It's not automatic.

8. "I can do it all." Nonsense. Nobody knows everything. Take classes, network, develop a support base and hire professionals. New businesses take lots of time and energy. If you try to do it all, you'll burn out. 

9. "My family and friends are all the support I need." Sure, they're supportive, but they may offer only warm and fuzzy feedback. Call on objective parties to give you the absolute truth about what you're doing right and wrong.

10. "Starting a business will be a breeze." New ventures are almost always harder than the founders anticipate and most business owners go through an "I can't do this anymore" stage. The successful ones ride out the discouraging times and lean on  support networks to get through.

There are several ways to initially fill your coffers including personal funds, cash injections from family and friends, loans, venture capital firms that specialize in financing new businesses and wealthy angel investors who have no institutional affiliation.

The process, however, is complex and you want to make sure that the deals you make are in your best interest. At the top of the list may be negotiating the amount of control you retain in the company. After all, it was your idea and you don't want to lose ownership.

Here's a quick rundown of the major sources of start-up financing and how each can affect your ownership:

Personal Funds

This is the most common source and is often preferred because it allows you and your co-founders to maintain control. Most importantly, it shows your commitment to the enterprise, which can help you develop a strong position for later venture capital financing.

Another advantage is getting you into business faster, without the delays that can accompany efforts to attract outside capital. One source of personal financing is the cash value of whole life insurance policies you may have. You may have accumulated a considerable cash surrender value that you can borrow against, although you should use this technique with discretion.

Venture Capital

This is usually a good source of money, if you are able to negotiate reasonable and acceptable terms that relate to your control over the company and the return that venture capitalists expect from their investment. Some investors may insist on taking an active role in strategic planning and company operations. Professional advice can really help in these negotiations, particularly when bargaining power may not be equal on both sides of the table.

Financing is often done through "rounds" over time and may involve one or more sources. You may have to wait about six months from initial contact to the transfer of funds.

Valuations also may rise between rounds depending on such factors as increased numbers of customers or new products and services.

Friends, Relatives and Angels

Here, you may be able to get good terms, but be wary of unrealistic expectations. Friends, relatives and angel investors may be unsophisticated and have unbalanced portfolios and that can lead to friction and intrusiveness during the volatile ups and downs that most start-ups experience.

This financing also tends to be a one-time deal, so there may be little chance of getting them to boost their investments later.

Other Sources

Banks and federal agencies offer loans for new businesses and you should investigate any that seem suitable for your venture. In addition, you can sometimes find other companies that may finance the development of a product in exchange for either taking an interest in it or acquiring it at some point. Former employers or industry peers can be tapped in this way.

The Rest of the Story

Finding the initial capital is just part of the process. You will also want to determine the best means of acquiring the money by choosing between stock offerings, loans, mezzanine financing and the like.

Moreover, timing counts. The economic climate always has a significant effect on how you raise money, how much you get and how fast you grow.

Seek professional advice from the outset and continue consultations during the process to help ensure you get the best deal with the best terms. Proper guidance can help minimize your tax bill and bring you through a successful initial public offering when the time is right.

Finding and signing the right deal takes good planning. The success of your venture and continued control over the business is at stake.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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