The number one question I get asked as a small business start-up coach is: Where do I get start-up cash?

I’m always glad when my clients ask me this question. If they are asking this question, it is a sure sign that they are serious about taking financial responsibility for start it.

Not All Money Is the Same

There are two types of start-up financing: debt and equity. Consider what type is right for you.

Debt Financing is the use of borrowed money to finance a business. Any money you borrow is considered debt financing.

Sources of debt financing loans are many and varied: banks, savings and loans, credit unions, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. Loans from family and friends are also considered debt financing, even when there is no interest attached.

Debt financing loans are relatively small and short in term and are awarded based on your guarantee of repayment from your personal assets and equity. Debt financing is often the financial strategy of choice for the start-up stage of businesses.

Equity financing is any form of financing that is based on the equity of your business. In this type of financing, the financial institution provides money in return for a share of your business’s profits. This essentially means that you will be selling a portion of your company in order to receive funds.

Venture capitalist firms, business angels, and other professional equity funding firms are the standard sources for equity financing. Handled correctly, loans from friends and family could be considered a source of non-professional equity funding.

Equity financing involves stock options, and is usually a larger, longer-term investment than debt financing. Because of this, equity financing is more often considered in the growth stage of businesses.

7 Main Sources of Funding for Small Business Start-ups

1. You

Investors are more willing to invest in your start-up when they see that you have put your own money on the line. So the first place to look for money when starting up a business is your own pocket.

Personal Assets

According to the SBA, 57% of entrepreneurs dip into personal or family savings to pay for their company’s launch. If you decide to use your own money, don’t use it all. This will protect you from eating Ramen noodles for the rest of your life, give you great experience in borrowing money, and build your business credit.

A Job

There’s no reason why you can’t get an outside job to fund your start-up. In fact, most people do. This will ensure that there will never be a time when you are without money coming in and will help take most of the stress and risk out of starting up.

Credit Cards

If you are going to use plastic, shop around for the lowest interest rate available.

2. Friends and Family

Money from friends and family is the most common source of non-professional funding for small business start-ups. Here, the biggest advantage is the same as the biggest disadvantage: You know these people. Unspoken needs and attachments to outcome may cause stress that would warrant steering away from this type of funding.

3. Angel Investors

An angel investor is someone who invests in a business venture, providing capital for start-up or expansion. Angels are affluent individuals, often entrepreneurs themselves, who make high-risk investments with new companies for the hope of high rates of return on their money. They are often the first investors in a company, adding value through their contacts and expertise. Unlike venture capitalists, angels typically do not pool money in a professionally-managed fund. Rather, angel investors often organize themselves in angel networks or angel groups to share research and pool investment capital.

4. Business Partners

There are two kinds of partners to consider for your business: silent and working. A silent partner is someone who contributes capital for a portion of the business, yet is generally not involved in the operation of the business. A working partner is someone who contributes not only capital for a portion of the business but also skills and labor in day-to-day operations.

5. Commercial Loans

If you are launching a new business, chances are good that there will be a commercial bank loan somewhere in your future. However, most commercial loans go to small businesses that are already showing a profitable track record. Banks finance 12% of all small business start-ups, according to a recent SBA study. Banks consider financing individuals with a solid credit history, related entrepreneurial experience, and collateral (real estate and equipment). Banks require a formal business plan. They also take into consideration whether you are investing your own money in your start-up before giving you a loan.

6. Seed Funding Firms

Seed funding firms, also called incubators, are designed to encourage entrepreneurship and nurture business ideas or new technologies to help them become attractive to venture capitalists. An incubator typically provides physical space and some or all of these services: meeting areas, office space, equipment, secretarial services, accounting services, research libraries, legal services, and technical services. Incubators involve a mix of advice, service and support to help new businesses develop and grow.

7. Venture Capital Funds

Venture capital is a type of private equity funding typically provided to new growth businesses by professional, institutionally backed outside investors. Venture capitalist firms are actual companies. However, they invest other people’s money and much larger amounts of it (several million dollars) than seed funding firms. This type of equity investment usually is best suited for rapidly growing companies that require a lot of capital or start-up companies with a strong business plan.

Mergers and acquisitions (M&A) can appear dauntingly complex with the various transaction structures and numerous participants involved in the process. Adding to the confusion, industry players are often coined by multiple, synonymous names. It’s no wonder many outside Wall Street view the M&A industry as a Byzantine Empire of financial wizardry.

Setting aside the various transaction types and associated financial engineering for now, this article provides a structured outline of the roles played by the various M&A participants. In any given transaction, M&A participants may be categorized as the Seller, the Buyer, the Adviser or the Financier. The role of each is outlined below.

THE SELLER

While the number of shareholders in a particular company may vary from a single person to thousands, for the purposes of this article, the number of shareholders is not significant. Collectively, the shareholders are referred to as the Seller.

THE BUYER

Generally speaking, the buyer universe is divided into three camps: Financial Buyers, Strategic Buyers and Public Investors. Financial buyers are those firms whose business model is to buy, to develop, and subsequently to sell businesses. Financial buyers acquire operating companies for their fund’s portfolio by making direct equity investments into these companies in exchange for a percentage ownership. By doing this, the financial buyers expect to profit from both the cash flow that the operating company generates and the capital gains realized upon exit (upon selling the company). Financial buyers therefore acquire and grow businesses in anticipation of implementing a future exit strategy. The exit provides the financial buyer liquidity (converting their equity back to cash) to either re-invest in a new company or to distribute as proceeds to the firm’s limited partners (the entities that contributed capital to the financial buyer’s fund).

Financial buyers’ investment preferences usually fall within a certain investing bandwidth coinciding with the phases of corporate growth – from startup to maturity. Consequently, different financial buyers are more prominent at different stages of a company’s life cycle. As a result, financial buyers are often categorized by the maturity and size of companies in which they typically prefer to invest. Although there is some overlap across each of the categories, the following are recognized industry naming conventions of three distinct types of financial buyers:

* Angel Investors: Angel investors are typically high net worth individuals who back an entrepreneur during a company’s startup phase. Angel investors hope to back a good entrepreneur with a good idea. Together with venture capital firms, angel investors provide the earliest stage of investment to a company as it is newly founded.

* Venture Capital Firms: Venture Capital firms (VCs) generally invest in companies from a pool of money (a fund). Like angel investors, venture capital firms tend to invest in the early phases of a company’s life-cycle. However, because VCs often have sufficient funds to make much larger investments than a high net worth individual, as a group, venture capital firms often invest in growth companies a bit later in stage compared to angel investors.

* Private Equity Firms: Private equity firms (sometimes called financial sponsors, buyout firms or investment companies) almost always operate from an invested pool of money contributed from a variety of sources including wealthy individuals, pension funds, trusts, endowments and fund-of-funds. While there are always exceptions, private equity investors typically invest in companies that have matured beyond the proof-of-concept phase, where the company possesses a definable market position, a solid revenue base, sustainable cash flow, and some competitive advantage, yet retains plenty of opportunity for further growth and expansion.

It should be noted that while the majority of private equity firms closing deals in the market place operate from a pool of committed capital, there are also unfunded sponsors, who essentially operate as opportunity scouts. Once they find a business that they would like to purchase, they then seek to raise the required capital. Relative to a private equity buyer with a fund of committed capital, an unfunded sponsor is disadvantaged in that the seller may perceive him or her to be a higher risk candidate to actually close the transaction, given the lack of committed capital. On the flip side, an unfunded sponsor is under lower pressure to make acquisitions because he or she does not have an idle pool of capital waiting on an investment opportunity.

Strategic buyers (also called industry buyers or corporate acquirers) are companies that are primarily geared toward operating within a given market or industry. Strategic buyers typically acquire companies for the synergies resulting from the combination of the two businesses. Synergies may include revenue growth opportunities, cost reductions, balance sheet enhancements or simply size in the marketplace. As such, strategic buyers look to make acquisitions with an integration strategy in mind rather than an exit strategy (as in the case of a financial buyer).

Because of the opportunity to benefit from potential synergies, it is generally thought that strategic buyers should be able to justify a higher price for a target company compared to a financial buyer for the same company. However, in certain instances, financial buyers may look and behave like strategic/industry buyers if they hold complementary operating companies in their portfolios. This is why searching the business profiles of the portfolio companies owned by private equity firms is key to finding those targeted financial buyers that may act like a strategic buyer.

Different from the financial buyer and the strategic buyer, the seller may instead elect to sell the company to public investors by floating some or all of the company’s shares on the securities market through an initial public offering (IPO). If the selling company is already publicly-traded, it may also elect to issue new, additional shares to the investing public through a secondary offering (also called a follow-on offering). Publicly-traded companies are usually more mature and established, with sufficient historical operating performance to better gauge the performance of the company. While a public offering may offer attractive valuations for the seller, the process is also quite expensive and comes with the burden of tight regulatory constraints for the company going forward.

THE ADVISERS

The Advisers to an M&A transaction usually consist of the M&A Adviser and the professional service providers. Analogous to a real estate agent in the function they perform, M&A advisers are the link between the Buyer and the Seller and are usually the catalyst that keep a transaction moving forward. M&A advisers are referred to by various names, segregated by the size of the transaction that they typically handle. Although there are no generally accepted thresholds within the industry to clearly delineate where one type of firm ends and the other begins, as a general guidelines for the purposes of our M&A Advisory Firm data module:

* Investment bankers serve clients whose enterprise values are consistently above $50 million (on the low end and often in the billions).

* Middle market investment bankers (also called intermediaries) normally work on deals with enterprise values between $5 million and $75 million.

* Business brokers are those firms that consistently work on transactions with an enterprise value less than $5 million.

Other professional services typically involved in an M&A transaction include transaction attorneys, accountants and valuation service providers. The transaction attorneys’ involvement in a deal varies by firm and by transaction. However, at a minimum, the transaction attorneys have the primary responsibility to draft the contract and may also be involved in the negotiations. The accountants serve to provide financial and tax advice to the principals (the buyer and the seller) in a transaction. Frequently in an M&A deal, an independent valuation of the company is needed or required. This is performed by a valuation service provider, whose goal is to assign a third-party, fair market value to the company. Private Equity Info also provides subscribers with a data module of valuation service providers.

THE FINANCIERS

Senior lenders provide senior debt to companies. In an M&A transaction, the buyer, in addition to the equity investment, looks to lending institutions (typically commercial banks) to provide some senior debt to fund the purchase.

Senior debt within an M&A transaction is analogous to the first mortgage on your house. In the event of a default, the senior lender is the first in line to get paid from any liquidation value from the underlying asset, in this case the purchased company’s assets.

Unlike angel investors, VC’s and private equity groups who normally make pure equity investments in companies, mezzanine lenders provide subordinated debt to a company, often with a potential for equity participation through convertible debt. Mezzanine debt may also be sought to finance a company’s growth or working capital needs. However, in an M&A transaction, mezzanine firms frequently team with strategic and financial buyers to bridge the gap between equity and debt. Mezzanine loans are analogous to the second mortgage on your house.

Because mezzanine lenders are behind senior lenders in the hierarchy of bankruptcy proceedings upon default, mezzanine investors look to invest in companies with solid historical cash flows, which enable the company to service the required interest payments on the debt.

A number of large institutions offer mezzanine lending for M&A transactions of various sizes. However, small business investment companies (SBICs), government-sponsored entities, also provide mezzanine debt strictly to smaller M&A transactions.

Merchant banks are simply investment banks that are willing to invest some of the firm’s capital as an equity investment into a transaction in which they are also the adviser. Some argue that the merchant banking business model has inherent conflicts of interest – in the case where a merchant bank is advising the seller (and hence should be trying to get the highest valuation for its client company) and also acting as a buyer (and hence trying to get the lowest valuation). The counter argument, provided by the merchant banks, is that the firm believes in the deal and the client company’s future prospects to the extent that they are willing to invest their own capital to support the transaction. In most cases, merchant banks make small, minority investments.

Lastly, it is typical in M&A transactions for the seller to also be a financier. If the collective equity and debt provided by the buyer do not equate to the desired purchase price, the seller may be asked to carry a seller note to bridge this funding gap. This is analogous to owner financing when selling your house.

If you have launched your own startup, your first biggest challenge is to raise capital. Fortunately, you choose from a lot of options to raise the funds your business needs. Among all the sources, crowdfunding is one of the best ones as it helps redefine how startups can get off the ground. In this article, we are going to help you know the benefits of raising capital with private investors through a crowdfunding platform. Read on to find out more.

Benefits of raising capital with private investors

1. Funding is not equity-based

First of all, crowdfunding is not necessarily equity-based. Although startups have the liberty to use the equity in order to catch the attention of potential investors, It’s not required to give up ownership to collect capital.

The good news is that some platforms allow their members to apply a reward-oriented approach in order to raise capital. For instance, if your business deals in a specific product, make sure you hand over a few units to your prospective investors before you roll it out for the ultimate users.

2. Attracting potential investors is easy

With crowdfunding, you can attract a lot of potential investors without putting in a lot of effort. Although you can try for angel investors, keep in mind that this process can cost you a lot of time. The reason is that you will have to pitch your small business concept several times.

On the other hand, if you use a crowdfunding platform, you will have to post your business pitch in only one place. And this page will be ready by hundreds of investors from across the globe.

These platforms have a lot of useful features that may help startups collect funds from investors. So, attracting potential investors and raising capital will be much easier using crowdfunding platforms.

3. Higher visibility

Crowdfunding can help you make your startup more visible. Since marketing may consume a large chunk of your budget, it makes sense to use a crowdfunding platform instead. For potential investors, it’s easy to fund a crowdfunding campaign.

And these activities can help boost the visibility of your brand. Plus, you can also attract investors for your next funding rounds.

The Bottom Line

If you want to raise funds for your startup, crowdfunding can be the best choice. All you need to do is become part of a crowdfunding platform and you will be able to tap into the pool of potential investors. And this will help you kick start your business and make it a success in the industry.