How realistic are your chances to secure business capital?

Many paint a dismal picture of the potential for small business funding success, but we are pragmatically optimistic. We believe a high percentage of businesses have the potential for successful capitalization, though in differing amounts and in different ways. To build a case for this optimism, let’s start with a snapshot of the economic health of the country.

While there are indications that the U.S. economy may be stabilizing, many still question the underlying health of our economic system. The stock market has been wildly unpredictable the past few years. Some weeks end with gains of hundreds of points, and other weeks lose similar amounts.  The stock market has still not recovered from the losses sustained in the most recent financial meltdown. 

Additionally, major financial scandals have rocked the nation, accounting for tens of billions of dollars of investor losses. Though some of the perpetrators have been caught, one can’t help but wonder how many other big money rip off artists are still at large.

The housing market continues to struggle. Average home prices have declined, and are still soft in many parts of the country. Industry experts believe the massive slide in home values is nearing an end, but that the market may remain soft for quite some time. 

Even after the federal government’s Troubled Assets Relief Program, bank loans are still relatively difficult to get. This is particularly vexing for small businesses, many of which have also seen their lines of credit evaporate as banks cut credit limits.

How are small businesses getting funded in this economy?

Even with all of these challenges, small businesses continue to receive over half a trillion dollars of funding in the United States annually.

According to a recent study by the Kauffman Foundation, 64% of all small business funding comes from a variety of loans. The next largest source of business capital was owner/family investment, which accounts for about 13% of all small business funding. Business owners who put more of their own money into their companies to keep them going know what this is all about. Venture capital firms and angel investors together provide about 6% of all small business investment funding. The proportion of this funding allocated to existing portfolio companies and start-ups fluctuates from year to year.

The last category is the most difficult to identify and quantify, yet it accounts for 17% of all small business funding, even during difficult economic times. This category is “other” and represents many diverse capitalization alternatives that taken together amount to a huge opportunity for small businesses.

There are many challenges in ascertaining the total amount of capital available to small businesses from all sources. However, extrapolating data from several respected research organizations indicates there is over $100 billion in small business capitalization from “other” sources.

Where is funding for your business most likely to come from?

The first step in successful capitalization is determining where the right type of funding for your business is most likely to come from, and then focusing your efforts on those sources.

Do you qualify for a loan of the size you need, and are you willing and able to pledge adequate collateral for it? If so, then you may be good to go. If not, you’ll need to look elsewhere for funding.

Do you have the cash to fund the business yourself? If you do, you still may not want to shoulder all the financial risk alone. Banks and investors are still potential funding sources, and you’ll be able to approach them from a position of financial strength that can make your deal more attractive.

While there are important differences between venture capitalists and angel investors, there are also a growing number of similarities. If you have a highly scalable company that could do more than $30 million in revenue within the next few years, you could be a candidate for angel investor group funding, leading to eventual venture capital funding. Angel investor groups have formed across the country, and are comparatively easy to find. But of the roughly 50,000 angel investments make in per year, angel groups typically make less than 5,000 of them.  Solo angels and informal investors make the rest.

There are several hundred thousand active solo angels across the country.  They’re not as easy to find as angel groups, because they don’t advertise.  You find them by networking.  Because solo angels fund about 90% of all angel investment deals in the U.S., it can be very worthwhile to find them.

If all of these sources don’t provide the capital you need, informal investors may represent an excellent source of financial capital. You may have well-heeled relatives who’re willing to help finance your company. You can usually find out quickly if they’ll be helping or not. And then there are wealthy friends and associates – both those you have now, and those you may have in the future. Your ability to network and establish meaningful relationships with successful businesspeople can become a major factor in your capitalization success.

And let’s not forget the 17% of all small business funding that comes from other sources. Helping you tap into this massive pool, which is more than twice as large as all angel and venture capital combined, is one of our specialties.

We are justifiably optimistic about the potential of viable businesses to achieve capitalization, based in large measure on what our clients have been able to accomplish during both good and difficult economic times.

What is capital?

Capital comes in a variety of forms, including financial capital, human capital, and resource capital. We believe this expanded definition more accurately reflects the full range of opportunities that exist for entrepreneurs.

Financial capital is generally what we refer to when funding a business. There are many ways to secure financial capital through loans, equity investments, lines of credit, royalty financing, customer deposits, etc. These are primary sources of small business capitalization, and they typically require significant preparation and effort to successfully close.

In additional to financial capital, hiring a key team member that works without pay for a season in exchange for some equity is a form of capitalization. Engaging a supplier who provides product development support with deferred payment is a form of capitalization. Locating in a business incubator that gives access to low-cost production capacity and shared resources can also be considered a form of capitalization. The common thread is discounted, deferred, or non-cash-compensated resources to help propel the business forward.

By this definition of capital, investors come in in many forms beyond angels, venture capitalists, and institutional lenders. Potential employees, suppliers, customers, distributors, developers, marketing partners, trade groups, government entities, and more can all provide discounted, paid up, or deferred resources to help your business grow. They all need to have confidence that the result of their involvement will be worth the risk to support you. Time is money. By approaching these sources of capital with an “investor-ready” mindset and preparations, you will maximize your potential for enlisting their aid.

Contact us put your capitalization efforts on the fast track.