Guide: Fund Your Business

Before You Fund Your Business

If you are planning on starting a new business or hoping to grow the business you currently own, there is a very good chance you’ll need some type of funding to get to next steps. There are many financing options available, but before you leap into the land of lending, take some time to research the following questions:

How Much Money Do I Need to Start?

No two businesses are exactly alike. Even in a franchise business, the money needed for startup funds can vary from location to location. Before you can begin to look at financing sources, it’s important that you understand what your financial needs will be. This might include ‘seed’ money, to help cover the costs of doing business in the first few months of operation, as well as funds to cover ongoing fixed expenses (rent, utilities, administrative costs, etc.) and variable expenses (inventory, shipping costs, sales commissions, etc.). To help you identify some of your financial needs, we found these tips from the Small Business Administration, and a startup cost calculator from the Wall Street Journal.

What Will a Lender Need to Know?

Unless you’ve discovered you can totally fund your business by using your own money, chances are you’ll be approaching a lender or investor for financing. Here’s some key factors a traditional lender may look at when evaluating your loan. In addition to what a banker may look for, a private investor may have additional questions before considering financing.

What's Your Funding Stage?

Depending on the amount of funding you are looking for will determine certain expectations from investors. During your research and planning for “The Ask”, try to see where you fit within these various stages:

Pre-Seed

  • Amounts: <$100,000
  • Company Life Stage: Pre company
  • Purpose: Idea development and formation of founding team
  • Available data: Little to none
  • Who invests: Founder, Friends and Family; some state programs; contests; crowdfunding
  • Risk level: Extremely high
  • Expected rate of return: None 

Seed

  • Amounts: $250,000 - $1 million +
  • Company Life Stage: Early development
  • Purpose: Seed funding is used for research and development, proof of concept, product testing, prototype development. Companies move from idea to model and begin testing the market.
  • Available data: Soft data, value proposition, founder experience
    Who invests: Founders, Friends and Family; crowdfunding, Angels
  • Risk level: Extremely high
  • Expected rate of return: 50-75% 

Series A

  • Amounts: $1-3 million
  • Company Life Stage: Development
  • Purpose: Series A usually provides resources to further develop and scale the product; validate the business model (engage customers); and establish time to market
  • Available data: Validation, time to market, initial customer feedback
  • Who invests: Angels, VCs
  • Risk level: Very high Expected rate of return: 40-60% 

Series B

  • Amounts: $3-7.5 million
  • Company Life Stage: Shipping product
  • Purpose: Series B funds are often used to scale a business. Additional funding allows the company to complete product development, ship product and create early revenues.
  • Available data: Preliminary revenues
  • Who invests: VCs
  • Risk level: High
  • Expected rate of return: 35-50% 

Series C

  • Amounts: $7.5-10 million
  • Company Life Stage: Product backlog
  • Purpose: The Series C is often used by a company for operating capital to expand markets, to strengthen the balance sheet or to finance an acquisition.
  • Available data: Predictive revenues
  • Who invests: VCs
  • Risk level: Moderate
  • Expected rate of return: 30-40%

Mezzanine

  • Amounts: $10-20 million
  • Company Life Stage: Profitable
  • Purpose: Mezzanine financing usually helps a company prepare for an IPO or acquisition.
  • Available data: Hard data, net income
  • Who invests: VCs
  • Risk level: Lower
  • Expected rate of return: 25-35% 

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