Building Bench Strength for Your Startup

When you’re building a new business, it’s important to assemble a core team of trusted experts to ensure you lay a strong foundation for a successful, sustainable launch. These may include advisors in tax, legal, marketing, human resources or recruiting. When it comes to finances, your mind may jump to “Who’s going to lend me the money?”

Startup funding is certainly a necessity, but it’s not the whole picture. There’s tremendous value in having a well-rounded financial advisor who has expertise in guiding small businesses from infancy to acquisition and beyond.

A banking partner can strategize with you about early-stage pre-funding preparation, a practical timetable from ideation to launch and optimal deposit account structuring. They should also review with you the various options for financing. Barring a rich uncle who co-signs to bankroll the entire endeavor, the most common funding sources include one or more of the following:

• Personal funds. How much cash you’ll need varies widely by industry and scope of work, but you can count on investing money from savings or other assets, including marketable securities, cash surrender value of your life insurance or equity in your home. Decisions to use these assets shouldn’t be taken lightly, so a risk analysis is critical.
• Debt financing. There are several different types of debt-based financing. These are sources of capital that you will pay back instead of sharing your ownership stake in exchange for startup funding.
  • A line of credit for short-term working capital from a bank may be extended to you based on the cash flow of the business or an outside guarantor. Good personal and business credit history is also required. A working line of credit is generally secured by accounts receivable and inventory, and it typically requires a personal guarantee of the business owner or another individual as a secondary source of repayment.
  • If your bank isn’t able to offer a credit line because of the risk involved, asset-based lenders may have more appetite to extend a line of credit and dependent on assets on the balance sheet, including accounts receivable, purchase orders.
  • You could be eligible for a Small Business Administration loan. The SBA 7(a) program requires the owner to inject 10 percent (much lower than a bank), has extended terms and a lower cash flow coverage requirement.
• Equity financing. These options involve an exchange of equity ownership in the company for startup capital. Your banking advisor may know investors looking to engage in a business like yours. Types of equity financing include:
  • Angel investors, which can be family and friends or professional investors, are the largest source of seed and start-up capital for businesses. They tend to fund small businesses for longer periods of time and expect a lower return on investment than venture capital firms. The terms tend to be more favorable, especially because the angel investor doesn’t expect to get the money back unless the idea succeeds.
  • Venture capital (VC) usually doesn’t come into play at the start-up phase but instead once the start-up has been in business a while and needs to move to the next level. VC comes from professional sources that sink large sums of cash into businesses for equity ownership in companies they think have an opportunity to turn a larger profit.