Cayenne Consulting’s Capital Comparison Table
Entrepreneurs have access to a bewildering array of capital sources. The right one(s) for you depends on your venture’s stage of development, the intended use of funds, and other factors.
Your capital formation strategy is the specific sequence of capital sources you might pursue given your unique needs and circumstances. We’ve compiled a table of 31 common capital sources, comparing their key attributes so you can make an informed decision about how to finance your business.
Scroll table to the right to see all columns >>
|Capital Source||Description & Examples||Typical Amounts||Typical Users||Prerequisites||Typical Use of Funds||Advantages||Disadvantages|
|1. Personal Savings||Money you have saved up from sources like work, inheritance, lottery winnings, the sale of your house, court settlements, etc.||For most people, typically a few tens of thousands of dollars.||All entrepreneurs who are just getting started.||None, but it’s a good idea to have the rough outlines of a business plan in your mind before committing a lot of money.||Books, seminars, and online courses to learn about entrepreneurship; incorporation fees; initial legal fees; travel expenses (to attend trade shows or to meet with potential suppliers/customers/co-founders); prototype development; market research; etc.||You have 100% control; you don’t owe anybody else.||If the business doesn’t work out (and most do not), you will have lost all or most of your savings.|
|2. Credit Cards / Personal Loans||Any kind of debt for which you are personally liable – for example, credit card debt, or a personal loan from your bank (either secured or unsecured).||For most people, typically a few tens of thousands of dollars. For people with exceptional personal credit (or valuable collateral), maybe a hundred thousand or more.||All entrepreneurs who are just getting started.||Reasonably good personal credit; otherwise, same as above.||Same as Personal Savings.||You have 100% control.||You will end up with debt that you are personally responsible for repaying, whether or not your business is a success. If the debt is secured and you are unable to repay, then you forfeit the collateral.|
|3. Income from Day Job / Spouse||Family earnings that are not needed to cover basic living expenses.
Money that you might normally put towards entertainment or savings can be used to finance startup activities.
|For most people, typically a few hundred or thousand dollars per month.||All entrepreneurs who are just getting started.||Same as Personal Savings.||Earning more than you need to get by; otherwise same as Personal Savings.||Same as Personal Savings. You can take the process slowly while staying in your job so you can keep your head above water.||Same as Personal Savings. If you come up with any inventions while working for another company, your employer may be able to claim ownership of the invention – you should, therefore, work with an intellectual property attorney to make sure you have the rights to your invention.|
|4. Borrowing from Friends & Family||Any kind of borrowing (NOT investment) from friends & family.
This should be documented in the form of a promissory note (or convertible debenture) that specifies the terms of repayment (or conversion into equity).
Some promissory notes fall under the SEC’s broad definition of a security and are subject to various SEC regulations and disclosure requirements. Thus, a securities attorney should be used to document the transaction.
|For most people, a few tens of thousands of dollars. If you have a rich uncle, the sky is the limit.||Entrepreneurs who have exhausted the three personal sources of funding listed above.||Best practice is to provide your lenders with at least the beginnings of a business plan so that they understand your proposed business, the risks involved, and how you intend to use their money.
A promissory note that describes repayment terms should be used to document the loan, including recourse available to lenders if you are unable to repay the loan.
|For “Main Street” businesses, funds might be used to obtain and renovate a business location, purchase inventory or furniture & fixtures, legal work, zoning and licensing, initial staffing, working capital, etc.
For “Scalable” businesses, loan proceeds might be used to fund further R&D, prototyping, cultivating early adopters, developing partnerships, hiring some key employees, intellectual property protections, legal work, etc.
|Friends and family trust you. They are investing in you more than they are investing in the business.||If the business doesn’t work out (and most do not), you will owe money to friends and family.
This could put major strains on important personal relationships, especially if they did not fully embrace the risks involved.
Also, a securities attorney should be used to document the transaction.
|5. Home Equity Loan||Using equity in your home as collateral for a loan.||For most people, a few tens or hundreds of thousands of dollars.||Entrepreneurs who have exhausted the four personal sources of funding listed above and who are willing to “bet the farm” in pursuit of their business.||Equity in real estate, reasonably good credit, and (usually) a demonstrable ability to repay the loan.||Same as Borrowing from Friends & Family.||This is a fairly easy way to come up with substantial cash at a relatively low interest rate, but only if you have equity in your home.||This is personal debt, not business debt. You are responsible for repaying the debt whether or not your business is a success. If you are unable to repay, then the lender will foreclose on your home.|
|6. Reward-Based Crowdfunding||Promising a reward (such as a discounted product) in exchange for pledging pre-payment. Backers provide credit card info when they make a pledge, and their cards get charged once the campaign reaches a predetermined goal.
Kickstarter is the most visible example, with products like the Pebble watch and Zach Danger Brown’s potato salad. Other examples include Indiegogo and RocketHub.
|Small amounts from individual backers (usually the value of a package of goods or services). A few unusually successful campaigns (say, the Pebble watch on Kickstarter) can raise millions in total.
Most projects, however, raise no more than $10,000.
|Entrepreneurs with a physical prototype product and a manufacturing plan, or artists working on a creative project.||A very well thought-out pitch for your project. Photos, videos, and other multimedia are extremely helpful.
These campaigns are only as good as your ability to promote them, so a large social media network and strong marketing and publicity skills are important.
|For products, this typically includes the final stages of product development, setting up manufacturing, and distribution of products to backers.
For creative projects, this typically includes the costs incurred in developing the project and distributing it to backers.
|Provides a way to validate demand before finalizing the final product, committing to production, etc.
These are essentially pre-orders, so you are not selling equity or taking on debt.
|Successful campaigns require a tremendous amount of time and effort.|
|7. Investment from Unaccredited Investors||Selling shares of your business to “unaccredited” investors such as Friends and Family.
“Accredited Investor” is a term defined by the SEC; they must meet income and net worth criteria. Unaccredited investors are presumed to be less sophisticated, and therefore in greater need of protection.
A securities attorney should be used to document the transaction and ensure compliance with various federal and state regulations.
Unlike loans, investments usually do not have to be repaid. Instead, investors hope to sell their shares at a higher price.
|For most people, a few tens or hundreds of thousands of dollars (your rich uncle is probably an accredited investor and will be described in the Angel Investors row below).||Since the cost of engaging a securities attorney can be substantial, this is probably unsuitable for extremely early stage entrepreneurs. Typical users will have exhausted the personal sources of funding listed above.||Shares of stock must either be registered with the SEC or must qualify for an exemption from registration.
Disclosure and documentation requirements vary depending on the amount being raised.
Many states have additional requirements beyond what is required by federal securities law.
|Same as Borrowing from Friends & Family.||None, really.||Various state and federal regulations will likely make compliance cost more than the amount being raised.|
|8. Donation Crowdfunding||Donation crowdsourcing is typically used to raise money to cover medical expenses, other hardships, events, or humanitarian causes. It is generally not appropriate for raising capital for entrepreneurial ventures.
Examples include sites like GoFundMe and YouCaring.
|9. Debt Crowdfunding (or Crowd Lending)||Borrowing funds from a group of anonymous lenders through a debt crowdfunding site.
Examples include sites like FundingCircle and LendingClub.
|Small businesses can raise up to several hundred thousand dollars.||Typically, owners of small businesses that are successfully generating revenues, but in need of capital to fund growth, capital assets, etc.||Businesses must generally have been operating for a few years and generating modest revenue. Fair business and personal credit are also usually required.||Hiring new personnel, opening new locations, capital assets, inventory, working capital.||Possibly better rates and terms than loans offered by traditional banks.
Faster than bank loans.
|Origination fees can sometimes be substantial.|
|10. Investment from “Angel Investors”||Angel investors are wealthy individuals who use their own money to make equity investments in early-stage companies.
Some angels are tech entrepreneurs; others are successful doctors, lawyers, real estate developers, entertainers, professional athletes, etc.
|Typically, from a few hundred thousand up to a few million dollars.||Mostly “venture scale” businesses, i.e. those that have the potential to grow extremely rapidly.
Traditional small businesses (such as retail, food service, or real estate) are usually poor candidates for angel investors.
|Businesses with a strong team that can demonstrate traction in at least some areas such as intellectual property or paying customers.||Growth capital: new personnel, marketing, R&D, capital expenditures, etc.||The right angel investors can provide a lot more than just money, including industry expertise and a strong network of connections.
A “name brand” angel investor can be a “stamp of approval” making it easier to recruit talent and attract follow-on investments.
|The disclosure, documentation, and compliance requirements are substantial, even with accredited investors.
Some angels may not share the vision of the management team, especially if things aren’t going as planned. Sometimes this can be good; other times it can be a distraction.
|11. Equity Crowdfunding||Equity crowdfunding is the public offering of shares of a company, typically through a crowdfunding website. Although selling securities in the U.S. is a highly regulated activity, the JOBS Act and the SEC’s Regulation CF are gradually making the process easier.
Investors must be accredited, but the regulatory landscape is changing (keep an eye on Title III of the JOBS Act).
Examples include sites like AngelList, CircleUp, and Crowdfunder.
|Same as Angel Investors.||Same as Angel Investors.||Same as Angel Investors.||Same as Angel Investors.||If Angel Investors are right for a business, then equity crowdfunding is an easy way to get exposed to a large number of angel investors at once.
Most crowdfunding platforms offer standardized securities offering documentation.
|The crowdfunding platforms usually charge a percentage of the total capital raised.
You may end up with a large number of investors to whom you owe a fiduciary responsibility, and who all require regular investor communications.
|12. Investment from Angel Group||Angel Groups are “clubs” formed by like-minded angel investors who meet regularly to consider potential investments. Some investments are made through a pooled fund; others are made by the individual members.
Examples include the Tech Coast Angels, Band of Angels, and Golden Seeds.
|Same as Angel Investors.||Same as Angel Investors.||Same as Angel Investors.||Same as Angel Investors.||Similar to Equity Crowdfunding. Many “name brand” angel investors are members of angel groups.||Same as Angel Investors.
Note that most angel groups only invest locally. Most areas only have 1-2 angel groups so you need to get it right the first time.
|13. Seed / Early Stage Venture Capital||Venture Capital is a fund that invests in new or growing businesses in exchange for an ownership stake, and often, representation on the board of directors.
Venture capitalists are the professionals who manage the fund and make investment decisions.
The fund is made up of investments from institutions (e.g., pension funds and university endowments) and wealthy individuals.
Early Stage venture capital refers to funds that are willing to invest in companies that are relatively new, often before they are generating revenue.
Examples include 500 Startups and First Round Capital.
|From $100,000 to a few million dollars.||Potentially “venture scale” businesses, i.e. those that have the potential to grow extremely rapidly.
Traditional small businesses (such as retail, food service, or real estate) are usually poor candidates for venture capital.
|Businesses with a strong team that can demonstrate traction in at least some areas such as intellectual property and a well-developed prototype.||New personnel, R&D, customer acquisition, etc.||The right VC can provide a lot more than just money, including industry expertise and a strong network of connections.
A “name brand” VC can be a “stamp of approval” making it easier to recruit talent and attract follow-on investments.
|It can be difficult to persuade a VC to meet with you – it usually requires a recommendation from a mutual acquaintance. Even then, entrepreneurs have been known to make 50 or more presentations before getting a yes.
Note that VCs rarely say “no” directly, but anything shy of a firm Yes is an indirect No.
|14. Growth Stage Venture Capital||See description of Early Stage Venture Capital above.
Growth Stage Venture Capital funds invest in companies that are generating revenue, but require additional capital to finance rapid growth.
Most venture capital funds fall into this category. Examples include well-known funds like Kleiner Perkins, Accel, Benchmark, and Sequoia.
|A few million to a few tens of millions of dollars.||Same as Early Stage Venture Capital, above.||Same as Early Stage Venture Capital, above, plus, in most cases, some demonstrated customer traction – i.e., actual sales.||Same as Early Stage Venture Capital, above.||Same as Early Stage Venture Capital, above.||Same as Early Stage Venture Capital, above.|
|15. Late Stage Venture Capital||See description of Early Stage Venture Capital above.
Late Stage Venture Capital funds invest in companies that are well-established but are in need of a large amount of capital for further expansion, achieving profitability, preparing for an IPO, or for acquisitions.
Examples include Goldman, Sachs (which is also an investment bank) and Institutional Venture Partners.
|Tens or even hundreds of millions of dollars.||Established, rapidly-growing pre-IPO businesses.||A strong customer base and a strong product pipeline.||Sales growth, infrastructure, acquisitions, R&D, etc.||Same as Early Stage Venture Capital, above.
Also, late stage venture capital can provide significant funding for companies that wish to avoid the red tape associated with an IPO.
|Same as Early Stage Venture Capital, above.|
|16. SBA-Guaranteed Bank Loan||SBA guaranteed loans are offered by commercial banks, credit unions, and finance companies that participate in the SBA loan guarantee program. For for-profit businesses, there are two principal programs. General Small Business Loans fall under the 7(a) program. Real Estate and Equipment Loans are called CDC/504 loans.||The maximum loan amount on a 7(a) loan is $5 million and the average loan size is about $370,000. The same max amount applies to CDC/504 loans although in some instances, the max can be increased to $5.5 million.
The SBA will guarantee up to 85% on loans under $150,000 and 75% on loans over $150,000. There is no guarantee fees on loans under $150,000. On larger loans, guarantee rates range from .25% to 3.5% depending on loan size and maturity.
|Typically, owners of small businesses that are successfully generating revenues, but in need of capital to fund growth, capital assets, etc.
Also startup entrepreneurs who can put up personal collateral.
|The lending institution will require a business plan, financial forecast, personal financial statement, 2 years of personal and business tax returns (if available) as well as 2 years of financial statements for the business (if available).
Be prepared to provide equipment lists, intellectual property if appropriate, customer lists, etc.
The financial forecast must include a balance sheet, income statement and cash flow forecast presented monthly and annually. Remember that the cash flow forecast must include the loan principal and interest payments.
|Funds borrowed under the 7(a) program may be used for working capital, equipment, inventory, accounts receivable, renovation of buildings, refinance existing debt, purchase of business real estate. There are also restrictions.||The primary advantage of an SBA guaranteed loan is that the guarantee will help the bank approve the loan if the loan request makes sense and the bank believes that the borrower will be able to execute the business plan and therefore, repay the loan, as agreed and on time.
Another important advantage of an SBA guaranteed loan or any bank loan is that loans are always cheaper than equity.
|There are no real disadvantages. Remember, SBA guaranteed loans are not grants or gifts. The lending bank and the SBA expect to be repaid on time and with interest.|
|17. Unsecured Commercial Bank Loan||An unsecured commercial bank loan will usually take one of two structures: 1) a term loan that is extended for a specific period of time, say 60 months, with a fixed amortization of principal and interest, and 2) a line of credit, usually extended for one year which allows the borrower to draw down and repay up to a maximum amount.||Loans may be extended for any amount, usually over $100,000.||Borrowers are usually large, well-established, well-capitalized corporations.||These types of loans are only offered to a bank’s very best customers.||Unsecured loans are often used for general treasury purposes. In other words, just to have the funds available for unforeseen, future needs such as an acquisition.||Advantages include low rates and low commitment fees.||There are few disadvantages. However, late payments will harm your company’s credit score.|
|18. Equipment Lease Financing||Equipment leasing and equipment financing are used for any kind of equipment that is used for business purposes.
Examples can include office furniture and equipment, restaurant FF&E, construction equipment, manufacturing equipment and vehicles. Just about any type of equipment that a business can use.
Leases are usually written for 3-7 years or longer depending on useful life of the equipment. Computer leases are usually written for 3 years or less because they become obsolete fairly quickly. Leases for railroad cars, containers, and earthmoving equipment will usually be for much longer terms.
Equipment leases are offered by specialized leasing companies, large finance companies and banks.
|Equipment lease amounts can be as small as a few thousand dollars up to millions of dollars. An architect can lease a drafting table that costs $700 and a trucking company can lease 100 Peterbilt trucks that cost $80,000 each.||Virtually any business including: manufacturing, construction, transportation, technology, distribution, retail, restaurant, healthcare, financial services and more.||Equipment may be new or used. The lessor will require company financial statements and tax returns for companies that are over a year old.
In some instances, a personal guarantee by the owner of the company will be required.
Leased vehicles usually require additional paperwork. Leasing companies are experts at facilitating paperwork.
|May be used for virtually any type of business equipment used for legal business purposes.
Useful tip: Most small businesses do not care about ownership of equipment. They care about use of equipment. It is the use of equipment that enables businesses to make money.
|Equipment leasing is a favorite way for young, small companies to finance their equipment needs because the lenders are depending less on the lessees ability to pay and more on the collateral value of the equipment.
An equipment lease is an excellent way of matching the assets useful life with its financing term.
There is almost always less paperwork than in documenting a bank loan.
Many leases are written in such a way that when the lease matures, the lessee can simply tell the lessor to come and get their equipment and then lease new equipment.
|Equipment leases can finance equipment, but will not provide working capital.
The cost of capital is usually higher than a bank loan. However, equipment leasing is available to a larger audience.
|19. Lines of Credit||A line of credit, also called a revolving line of credit or simply a “revolver” is a type of commercial bank loan that provides a great deal of flexibility to the borrower.
In a line of credit, the borrower is given a maximum amount he is allowed to borrow and then is able to borrower and repay the loan according to his cash flow.
For example, a borrower may have a $200,000 line of credit. In the first month he may borrow $30,000, in the second month he may borrow $10,000 and then in the third month, he may repay $20,000 of the loan. He only pays interest on the outstanding balance each month. He never is obligated to repay principal until the loan matures. Most lines of credit are written for one year and then can be renewed each year on the maturity date.
|The amount of a line of credit should be determined by a borrower’s cash flow needs. For example, if a borrower’s accounts receivable are running 60 days and accounts payable are running 30 days, the line of credit should be written for an amount large enough to accommodate the timing difference between receivables and payables.||Users are usually companies that have short-term cash needs that might arise from timing differences between receivables and payables or the need to fund a capital or inventory requirement that may arise due to an unusually large order.||Line of credit borrowers usually have established businesses and excellent business and personal credit.||Funds are usually used to finance payroll, inventory and other short-term needs.||Lines of credit give borrowers great flexibility in borrowing and repaying loans. Interest rates are typically lower than on term loans.||Disadvantages are that lines of credit are usually offered to only the most qualified borrowers. Another disadvantage is the lender is not obligated to renew the line of credit on the maturity date. In most instances, if the borrower has met all of the bank’s requirements, as agreed, this should not be a problem.|
|20. Trade Financing||Trade financing is a way to finance or expedite the payment of goods and services between a buyer and a seller. Trade finance is usually facilitated by a financial intermediary (bank).
A typical trade financing is a short-term (less than one year) loan that is made to the buyer so that the buyer is able to order or purchase a product or service from a seller.
Trade finance is often used in international transactions where, for example, a company in China receives an order to make a large number of units of a product and then asked to ship the product to the buyer who might be in Europe or North America. In this example, the Chinese manufacturer must order the parts that go into the manufacturing process, then manufacture and package the goods, then ship the goods to the buyer’s dock. That can take 4-6 months. The manufacturer will want a deposit or possibly the entire amount of the order to be paid in advance. The buyer will utilize a trade finance solution to facilitate the transaction.
|Typical trade finance transactions will exceed $100,000 and can easily grow into the millions. Buyers usually arrange trade lines of credit so that they have the financing in place when they need it. Sometimes a manufacturer will only require a guarantee from a bank that payment will be made. These types of guarantees are called letters of credit. Most international trade financing is denominated in U.S. dollars but sometimes a foreign exchange transaction will be required as well.||Users of trade finance are usually, but not always companies that engage in international trade. Examples include agricultural products, aircraft parts and consumer products. Trade finance is not just for buyers and sellers. Trade finance is also used by “traders” or “trading companies.” A trader is an intermediary that, for example, has a source of dates in Libya and a buyer of dates in Canada. The trading company will expedite every aspect of the transaction, including financing, customs and clearing, shipping, and payment. For this, the trading company earns a commission.||A trade finance borrower must be creditworthy. Trade finance is usually arranged through a bank and the borrow must meet the underwriting requirements of the bank. The bank will require details of the transaction, a business plan, financial statements and other company documents. Banks want to be assured that they will be repaid. Banks, after all, have little use for 50,000 pounds of frozen shrimp.||International trade.||The advantage to trade financing is that a buyer is not required to use its cash when ordering goods and services.||The only disadvantage to trade financing is that there is almost always a great deal of documentation, especially in international transactions.|
|21. Asset Based Lending (ABL)||Asset based lending is a business loan that is secured by collateral such as a borrower’s accounts receivable, purchase orders, inventory, equipment or other balance sheet assets.
The most popular form of ABL is accounts receivable financing, often called factoring. For example, a company completes the work covered under a purchase order or contract and sends an invoice for payment to the customer. The customer might take 30-60 days to pay, while the company must pay for its material, labor, and other operating expenses well before it receives its payment from its customer. To more closely align the company’s costs with its receipts, the company can borrow 75%-80% of the value of its invoice from an A/R lender or factor on the day the invoice is issued. When the invoice is paid (directly to the lender), the company receives the remaining balance of the invoice less interest for the time the invoice was outstanding.
|Amount borrowed may be very small (say $1,000) to very large.||Users of asset-based lending include construction companies, manufacturers, and any other commercial enterprise that wishes to improve its cash flow by borrowing against is invoices, inventory, purchase orders, or other assets.||In order for ABL to work, a borrower must have customers that are creditworthy. The reason is that the asset-based lender is now lending against the credit of your customer rather than your credit. It is helpful if your customers are commercial customers rather than consumers.||There is only one use of the funds that you borrow. That is to increase your cash flow by collecting your money faster.||The principal advantage of ABL is that while you may not be financially strong enough to borrow money from a bank or finance company, often your customer is strong enough and it is the customer’s credit that the ABL lender relies on for payment.||The primary disadvantage is that ABL rates are generally higher than typical bank loan rates. However, you only pay interest for the time that the money is being used.|
|22. Vendor Financing||Vendor financing is provided by manufacturers or dealers as an incentive to buy equipment, technology, or vehicles from them. They make their profits from the sale of the equipment so they will often provide subsidized financing for the products offered. They will also often provide financing to customers who may not be able to get financing elsewhere by taking some credit risk in return for selling the equipment. Vendor financing is a great source of capital for smaller or emerging enterprises. For construction companies that need to add a new or used bulldozer to their fleet because of increased work, vendor financing is an excellent way to finance the purchase.||The amount can be of any size from a few thousand dollars for computers or lab equipment to millions of dollars for manufacturing or construction equipment.||Typical users include companies that heavily use vehicles such as transportation companies or construction companies.||Prerequisites might include providing proof that you have the work to support your use of the assets being financed. You should have good business credit.||Funds are used to finance equipment of all kinds. Vendor financing is never available for disposables (things you use up).||The advantages to vendor financing are that it is fast. You select the new or used equipment that you need and within an hour or two, drive it away. Another advantage is that most vendor financing covers 100% of the purchase price so there is no cash out of pocket for the buyer.||There are no specific disadvantages to vendor financing. Interest costs may be higher than what you can get through a bank loan. This is usually mitigated because you will employ the asset being financed to make money so that you can repay the loan on the asset.|
|23. Pre-Payment from Customers||Pre-payments from customers are among the very best way to finance your business and increase your cash flow. Pre-payments are often referred to as “deposits.” No matter what you call them, do not ever hesitate to ask for them. Companies ask for pre-payments in order to pay for materials that are used in the work to be performed. They are also requested when there is a commitment of upfront labor such as design costs or software development.||Companies will often ask for anywhere from 10% to 50% of the value of the work.||Construction companies, manufacturers, consultants, technology companies and any other business that has large upfront labor and materials costs.||The only real prerequisites are the ability to negotiate the terms of the payments agreement in the purchase order or contract.||Funds from pre-payments are used to purchase materials or labor necessary to fulfill the contract.||Obvious advantages include the positive impact on your company’s cash flow. Also, once you receive a pre-payment, you have less credit risk once the work has been completed.||There are no disadvantages to pre-payments.|
|25. Private Equity||See description of Late Stage Venture Capital above.
Private Equity funds like The Carlyle Group and Bain Capital invest directly in companies, primarily private companies. Sometimes they acquire a controlling interest in public companies through stock purchases.
Once they acquire or control interest in a company, private equity funds look to improve the company through management changes, streamlining operations or expansion, with the eventual goal of selling the company for a profit, either privately or through an initial public offering.
|Tens or hundreds of millions or billions of dollars.||Existing businesses with high growth potential or that are distressed or in need of a turnaround.||Substantial established customer base.||Growth, company restructuring or repositioning, acquisitions, major projects.||Same as Late Stage Venture Capital, above.||Same as Late Stage Venture Capital, above.
Private Equity funds sometimes take a larger percentage of a company than a venture capital firm, leaving the founders with smaller stakes in the company.
|26. Federal Grants||The federal government provides grants to small businesses that are engaged in scientific research and development (R&D). The program is called the Small Business Innovation Research (SBIR) Program.
Despite what you might hear on TV infomercials or online, the government (federal or state) does not provide grants for starting a business, paying off debt, or covering operational expenses. The SBA only gives loans to businesses.
|SBIR Phase I awards normally do not exceed $150,000 total costs for 6 months.
SBIR Phase II awards normally do not exceed $1,000,000 total costs for 2 years.
|Small businesses that are exploring high tech innovations which can commercialized in agriculture, defense, education, energy, health, transportation, environmental protection, and science.||Companies must be for profit entities, 50% of firm’s equity must be held by US citizens or permanent resident aliens. Companies must register in the SBIR/STTR Company Registry. Other restrictions apply.||Funds are only used for research and development.||As a grant, it’s not a requirement to repay funds. In addition, many venture capital firms look favorably on companies accepted into the SBIR program.||It’s an extremely competitive program and applying is time intensive.|
|27. Specialized Grants||Federal, state, and local agencies offer grants to small businesses within niche industries. For example, San Francisco offers a grant for water efficient equipment retrofits.
Foundations such as the Bill and Melinda Gates Foundation have given grants to for profit startups and small businesses driven by a desire to help others turn their ideas into viable companies. The companies must contribute to national and global economies.
Business competitions are another way to receive grants and validate your business idea. (NOTE: Avoid competitions that charge a fee to participate).
|Amounts vary by issuer or type of grant.||Users vary by issuer or type of grant.||Prerequisites vary by issuer or type of grant.||Uses vary by issuer or type of grant.||No repayment is required with grant funding.||Grants are very competitive and applying is time intensive.|
|28. EB-5 Financing||EB-5 is an investor-immigrant program for foreign nationals who wish to earn a “green card” or permanent residency in the U.S. by investing a minimum of $500,000 or $1,000,000 depending on where the investment is made. There are other requirements that must be met.
For example, a foreign investor might invest in a commercial real estate venture or purchase an operating business in the U.S. that meets EB-5 requirements.
|Amounts must exceed either $500,000 or $1,000,000 depending on where the investment is made. The lower minimum is for investments in economically disadvantaged areas.||Typical users include real estate developers that that require equity capital for their projects or businesses that require additional capital in order to expand or complete a strategic transaction.||The funds may not be borrowed from the investor. They must be invested as permanent capital.||Commercial real estate or business investment.||The primary advantage to the borrower is that EB-5 investors are usually passive investors. They rarely have an interest in participating in the management of the business. In addition, they are not motived by a return on investment as much as they are motivated by the “green card.”||The disadvantage is that there are only so many EB-5 visas issued each year and therefore there is often as much as a 2-3 year waiting period from the time of the visa application to the time the visa is issued.|
|29. Strategic Investment||Strategic investments come from non-financial companies or organizations that have an economic interest in the success of the target company.
The investors could be users of the target’s products/services, suppliers to the target, a company with a related product(s) seeking diversification or an enhancement to their existing product portfolio, a company seeking presence in a new geography, etc.
A structure growing in popularity is a consortium of like-minded strategic investors, for example, brokerages investing in trading technology.
|Depending on the target’s stage, a few hundred thousand dollars to tens of millions.
Often the strategic investor will increase their interest in the target over time.
The investor may seek other forms of return such as pricing discounts, rights of first refusal, guaranteed supply, etc.
|Growth stage companies.||For a research and development investment, the target company would at least have a minimum viable product (MVP) and market traction. Otherwise, the target’s product would often be in high demand.||Hiring, product development, and marketing.||Strategic investors typically expect lower pure financial rates of return on their investment because of the other economic benefits they can realize. For the same amount of investment, the target can keep a larger percent of their company.
Strategic investors can also improve the intrinsic value of the target company through marketing clout, reputation, access to production and other resources, and providing a steady stream of business.
Often strategic investors end up acquiring the target, providing for a smooth exit strategy and transition.
It can be easier to meet with a strategic investor than with a VC, especially if the strategic investor is a supplier, customer, or strategic partner.
|Strategic investors may demand exclusives or other restrictions that hamper the growth of the target business or are counter to the goals of the management team.
If they have favorable pricing and contribute a substantial percentage of the company’s revenues, profits and cash flow could be impaired.
The target could suffer if the strategic investor has its own financial, legal or reputation issue.
|30. Public Debt Financing||Public Debt Financing refers to the issuance of bonds by a borrower that are listed on a public exchange and regulated by the Securities & Exchange Commission (SEC). The bonds can be purchased by institutions, funds, or individuals. Public bonds can be traded on an exchange like stocks, with ticker symbols and referenceable prices and yields.
Bonds have preference over stock in the event a borrower is liquidated. Bonds are debt that must be repaid by a certain date (“maturity”). Bonds have a stated rate of interest (“coupon”) that can be fixed or floating based on an index. The coupon is based on a percentage of the bond’s par value (the amount that is initially borrowed and must be repaid), so the interest payment (usually paid semiannually) is consistent. The bond’s yield is determined by the price the bond is trading at relative to par, and the interest rate.
Some bonds can be converted into equity.
|Millions and billions of dollars.||Established businesses.||Ability to service the debt, i.e., make timely interest and principal payments.
Institutional investors require a debt issuer to provide a rating. Virtually all public bonds are rated by an independent ratings service such as S&P, Moody’s, and Fitch. There are 10 Nationally Recognized Statistical Ratings Organizations (“NRSROs”) registered with the SEC to rate debt instruments.
Other requirements include regulatory compliance with SEC filings, exchange filings, and prospectuses.
|Major projects, acquisitions, real estate, business expansion.||Issuing bonds does not dilute the percentage ownership of existing shareholders.
Interest on bonds is tax-deductible. In general, the total cost of debt capital is lower than the cost of equity.
Bonds do not carry voting rights.
When the debt is repaid, there are no ongoing responsibilities or compliance issues related to that debt issuance.
Often the debt is refinanced with a new debt issue (“rolled over”), meaning the issuer can retain the capital for a longer period of time.
|The costs of compliance, reporting, and issuing and servicing the debt are substantial – on top of the actual interest and principal payments.
Debt can include conversion or stock dividend features with the potential to dilute stockholders’ positions when exercised.
Like bank debt, public debt has convenants, i.e., terms that can restrict the commercial and/or financial activities of the issuer.
Missed payments or a default can impair or destroy an issuer’s credit rating, making future borrowing more expensive or impossible.
If market conditions are bad at a bond’s maturity, the issuer might not be able to roll over the debt at comparable rates, or at all.
|31. Initial Public Offering||An Initial Public Offering (“IPO”) refers to the sale of a new issue of shares of a company (“stock”).
Stocks are regulated by the SEC and traded on public exchanges or over the counter. Trading is a “secondary market” activity, as it does not bring new capital into the issuer.
|Millions and billions of dollars.||Established businesses.||Requirements include SEC filings, exchange filings, and prospectuses. Some exchanges have business performance requirements||Expansion, growth, and acquisitions.||An IPO can bring large amounts of capital into an issuer.
The ability to trade stock publicly provides investors with liquidity.
An IPO provides liquidity to early investors.
Being public can enhance a company’s awareness, brand and reputation.
The market value of the company is known at a given point in time.
|The costs of listing, compliance, reporting, dividend payments, and custody are substantial. These are but a few of the many disadvantages of going public.|
Disclaimer: This table is provided for informational purposes only, and does not represent legal, tax, or investment banking advice. Always obtain qualified legal and financial advice when raising, investing, or lending capital.
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