Alternative Venture Finance: Federal Grants and Loans

Alternatives to Venture Capital for funding startups

Financing a startup can be expensive, especially when venture capitalists are the only options. In order to help you get started with your business, here's a list of alternative ways to fund startups.

Federal Grants and Loans-Government institutions offer grants and low-interest loans as well as various other preferential benefits. One of the most notable benefits is that there are few restrictions on who can start a company and no requirement for the company to have commercial viability at startup time. State governments also offer both grants and loans to businesses in their state, typically without preference or restrictions on eligibility criteria.

SBA Loans-SBA loans provide startup companies with up to $65,000 in funding. The SBA requires that the company must be in default on a previous loan, not be in business for a year, and that it is not likely to close its doors during the first two years. This usually means that they are taking further financing out of debt or equity. The SBA also limits maximum annual interest rate to 10 percent and a maximum term of two years. Unlike commercial loans, startup firms will not receive collateral when seeking a loan with the SBA.

Donations-Nonprofit organizations may provide startup loans or grants as well as other resources for startups with special needs for funds. Nonprofit organizations that provide startup financing include the United Way, local health foundations, and religious organizations. You could also get assistance from individual investors if you are unable to secure venture capital funding.

Friends and Family Financing-If you have friends or family who believe in your project or business idea, they might be willing to assist with startup capital needs. Since many startups fail due to financial constraints, this approach isn't recommended for the typical entrepreneur. Friends and family loans typically come at a high cost through terms that are unfavorable to the young startup firm.

Equity Financing-Equity financing allows a startup to raise its share capital from private investors. The shareholders are eligible for dividends and are able to exchange their shares for new shares if the business's financial situation improves. Equity financing is preferable to loans because the startup can use money it raises from equity financing during a rough patch without having to access additional debt funding.

Business Planning-Business plan writing is not an exact science and there is no way of knowing how much money your startup will cost or how long it will take until you start generating profits. The good news is that the SBA is more likely to give your startup a small loan if you arrive at their office with a comprehensive business plan.

Business Plan Example-Get started on your business plan with this free sample template: http://www.fundinguniverse.com/samples/sample-business-plan-plan.htm

Equity investment capital is the most difficult to secure for startups because it requires some kind of incentive for an investor to fund a company without having any say in how the business is run. Using business planning as a tool, venture capitalists can identify lucrative businesses and decide which ones they want to continue funding past the startup stage.

The most common types of incentive-based investment capital in startups include convertible securities (notes) and preferred stock. Convertible securities are considered risky because they are very liquid in the market and an investor may not receive their full interest back upon conversion. Preferred stock options provide the investor with a guarantee of a set stake at the time of acquisition but require several years to become liquid. These terms can lead to significant tax liabilities if the business fails during that period.

When securing equity investment capital, young companies tend to lose appeal when they raise outside funds before obtaining venture capital funding or having achieved profitability or critical mass. In these cases, venture investors may be reluctant to back a business that has not demonstrated its success in the market.

If you would like additional information on financing startups, please visit our resources section: http://www.fundinguniverse.com/samples/sample-business-plan-plan.htm

Companies wishing to raise equity investment capital should complete financial statements outlining their startup's current financial status and projected growth with a feasibility plan that demonstrates how the startup's products and services will be profitable in the years ahead. This can show investors if they will make money on their investment through the sale of part or all of the company in the future.

Funding a startup with equity investment capital creates tax liabilities that are different than those caused by debt-based loans. The most notable difference is that the taxation is more complicated when dividing up the profits because they are unlikely to be clearly delineated among investors. Therefore, it is critical to consult with a professional accountant prior to securing outside funding.

For additional information on small business financing and startup growth, please visit http://www.fundinguniverse.com/samples/sample-business-plan-plan.htm and http://www.fundinguniverse.com/

Excerpted from: http://www.fundinguniverse.com/startups/alternatives-to-venture-capital.htm

http://www.fundinguniverse.com/samples/sample-business-plan-plan.htm

Do you want to be involved in a startup? Are you seeking funding options to help your business plan move forward? FundingUniverse is an online resource that connects investors and business owners with the best funding solutions by providing valuable resources, tips and advice, as well as articles on how to successfully raise venture capital. For more information on our editorial or financial services please fill out the online form: http://www.fundinguniverse.com/newsletters_subscribe.htm http://www.fundinguniverse.com/funding-news/venture-capital/.

Company Name: Funding Universe LLC

Company Website: http://www.fundinguniverse.com/

Funding Universe is a privately held online resource that provides valuable business, investor and product information to thousands of business owners and venture capitalists since 2001. Funding Universe has created an environment where entrepreneurs can turn their concepts into reality by providing a wealth of resources to help connect them with the right investors who can help them get the funding they need to realize their goals. The company also maintains an accurate and up-to-date listing of corporate financing, private capital sources, bond issues, equity funding, late stage credit and more that is updated monthly.

Conclusion

The above described information and suggestions should help you begin the process of raising capital in your business. Whether you are looking for personal financial assistance, or business-oriented funding, the resources listed here can point you in the right direction to better your company's future.

A great start is to make an appointment with your banker and open a line of credit (business loan) so that you can get started on your journey. Another good step is to contact banks or lenders who specialize in small business funding by visiting http://www.fundinguniverse.com/samples/sample-business-plan-plan.htm and http://www.fundinguniverse.com/samples/sample-business-plan-plan.