Securing funding for a business is the first test of entrepreneurship. It will often indicate your level of commitment and the likelihood of your success. If you are seeking funding to start up a new division in your construction firm, this is also the point at which you first incur risk. It’s the point at which you realize that all the planning, research and development that went into the business plan was the easy part. It is the phase that separates the dreamers from those who are willing to undertake financial risk for the opportunity to run a business.
For those who are serious, many funding options exist. For the conventional owner, one who has assets and good standing in the eyes of banking institutions, the first option can be to apply for a small business loan from the bank. Most banks have divisions devoted solely to the assistance and growth of local small businesses. Before approaching a bank for a small business loan, however, it’s important to evaluate as many banking institutions as possible to find the best fit. You should schedule meetings with the banks’ small business banking decision makers.
There are two goals you need to accomplish at these meetings. The first is to find out about the bank’s lending trends in the past. Ask about what types of businesses they are most comfortable lending to, and gauge their familiarity with the construction industry. It will make for an easier sale if the individuals involved in the loan process are familiar with the concerns of construction firms. Second, you want to make a personal connection with the individual to whom you are speaking. You want this person to get to know you and to feel comfortable with you so that when the bank is in the process of making a decision, you have at least one advocate in the room.
Another funding option is the Small Business Administration (SBA). If you are not already, you should be involved with your local district office. Their counselors are able assist you with your business strategy and inform you about the many small business loan programs and grants that are designed for those who may have trouble qualifying for a traditional bank loan. Although the SBA does not loan money, the loan programs they provide are used as guarantees to the banks. These programs provide assistance that reaches many who otherwise would not be served by the private sector. The SBA is also an important source of capital and training assistance for low-income women and minority business owners and can help owners identify federal and state grants for business startups and expansions.
One of the most common complaints of small business owners who apply for funding through institutions is that they are treated as a number. Therefore, it’s a viable option to look for funding from those who know you best—namely, your friends and family. In this case, you should still make a presentation as if you were applying for a loan through a lending institution. Each aspect of how the money will be used, the business forecast and the rate of return should be discussed at length. Everyone you speak with already knows your commitment and personality, so once you reveal the business strategy, they should feel more comfortable investing in your business venture than a banker would. When you make your pitch to your friends and family, it is important that you create a formal setting for the presentation. Address them not as friends and family but as investors. You need to impress them with your business strategy and rate of return and let them factor in the relationship afterward.
Venture capitalists will also work closely with you. When approaching a venture capitalist, you should be prepared to present a business summary, a business plan with detailed projections and marketing materials. Then you may be granted an interview. Venture capitalists look for business owners who are experienced in the trades they are working in and who have established management teams consisting of reputable individuals. With both venture capitalists and angel investors, the first few minutes of your interview are crucial, as they are looking for someone they can trust will succeed. The rapport you can build with them is an important factor in determining whether they will choose to spend the next few years working with you. Venture capitalists generally make investments of $50,000 to $500,000 and ask for 30- to 40-percent ownership. Therefore, it’s important to know how much you are willing to give up before you walk into these types of interviews.
The unconventional business owner, who has no business credit history and who does not have an abundance of assets, may seek angel investors as a funding option. Angel investors are usually successful business owners themselves and can offer more than financial funding; they also can provide valuable business insight. These types of investors commonly take on small start-up businesses within a 50-mile radius of home and provide funding from $150,000 to $1.5 million. For those who became business owners for independence, there is a downside to angel investors. These investors will require anything from 5 to 25 percent of your business, a seat on your executive board and stock options. They also seek, on average, a 26-percent return rate on the investment. The relationship between an angel investor and a business owner is a delicate one, so if you decide to use this type of funding, remember to choose your investors wisely.
The best entrepreneurs have confidence and take an all-in approach. I often liken the startup process to a tightrope walk without a safety net. Although you may lose your balance, stumble or even have to hang on for dear life, falling can never be considered an option. The most important thing to remember is that successful business owners know exactly how much they need and can explain to the potential funding source how every penny will be spent.