Ways to Raise Money for Your Company or Idea

Forms of Funding

There are many different ways to raise money for your company. Some are more expensive than others, some are more time-intensive than others, but every entrepreneur should be aware of the different types of funding available and what's in store for them as they pursue each.

Some of these Forms of Funding include:

1. Self-Funding

2. Loans

3. Asset-Backed Funding

4. Angel Funding

5. Venture Capital

6. Private Offerings

7. Limited Public Offerings

8. Public Offerings

Self-Funding may be the easiest form of financing. If you need less than $100,000 to fully fund your company, this is probably the best route for you. This form of funding consists of you raising money from friends, family and/or prominent acquaintances, as well using your credit cards, taking out a home equity loan, cashing in your IRA and selling off your second car or baseball card collection.

In return for your family and friends investing in your business, you may pay them with interest and/or equity. These payments may come in the form of preferred stock, Sr. or Jr. Debt, convertible debt, royalty contracts, equity kickers, common stock or any other method they will take in return. Generally, they will want to be paid in interest and/or equity.

Loans here refer to the loans you get from a financial institution (bank, credit union, etc.). Generally, you must have collateral, credit and ability to repay to receive a loan from any of these sources. If you lack any one of these three components, you will probably fail to get your loan. You may, however, find someone to guarantee or co-sign on a loan for you if you are lacking any of these key requirements.

In return for the loan, you will agree to pay the principal and interest back in a predetermined manner. If you fail, the institution may seize any collateral assets, report the incident to the credit bureaus and/or sue for any losses not recovered.

Asset-Backed Funding usually includes the financing of invoices, order contracts, accounts receivable, equipment, vehicles or real estate. In addition to straight financing arrangements, factoring and lease (and sale-leaseback) are grouped in this form of funding. This type of funding is usually used to increase the flow of cash in already existing companies that are already profitable.

In return for providing the funding, these sources generally require transaction fees and percentage spreads as payment.

Angel Funding is usually provided to companies in the "seed" and "first round" stage. Any pre-revenue funding provided by an institutional investment company or sophisticated investor is usually considered Angel Funding. So if your company has not started generating income yet, this may be the only source of institutional funding available to you.

In return, these "angel investors" usually get a big slice of your company and usually want to control at least the checkbook, if not the whole company. Some people think they should be called "devil investors" instead. If your management team is strong, angel investors are a great source, as they probably won't require such control restraints.

Venture Capital usually includes funding to companies already generating revenue or just about to enter into the revenue phase. Venture Capitalists (VC's) usually get involved in the first or second round of a company, where they can reduce their risk (compared to the "seed" round), yet still make a sizable return on their investment.

VC's usually want to see that they have good potential to earn about 15 to 20 times their money within four to five years if the company is successful. However, most VC's bring much more than money to the company; they bring their contacts and management skills too (as do most angel investors).

VC's may also require considerable amount of control and equity in your company. Depending on your plans for the company and the amount of capital you need, it may be the fastest way for you to capitalize your company.

Private Offerings may very well be the easiest way to raise substantial money ($100k to $20 Million) for a start-up or early-stage company without giving up control and management of your company. Private offerings are generally exempt securities offerings that do not require registration; they generally do require a notice filing though (some very small offerings do not require registration or filing; rules vary state to state).

Companies may not use general advertising (or most direct marketing methods) to promote a private offering; generally, you may only offer to known accredited investors. Investors generally must purchase these securities for hold and generally may not resell them to other investors. Usually, the issuing company will buy these private securities back from the investor or convert them to other securities.

Only Broker-Dealers and Issuing Companies can legally offer new securities to investors. Broker-Dealers rarely (essentially never) will represent a start-up or early-stage company, so the Issuing Company must sell their securities directly to investors. There are many regulations concerning the offering of securities, but your company may issue securities. We have a free e-book available to teach companies about issuing securities through Private Offerings and Limited Private Offerings.

Your company should never conduct a securities offering without consulting a securities attorney first.

Limited Public Offerings allow companies to use general advertising (and some direct marketing methods) to market the securities offering to the public. There is usually a registration process (60 - 90 days process) required to affect a limited public offering (LPO). Some LPO's allow the company to sell securities to investors regardless qualified or accredited status; some do not.

Investors generally must purchase these securities for hold and generally may not resell them to other investors. Usually, the issuing company will buy these private securities back from the investor or convert them to other securities. As noted above, there are many regulations concerning the offering of securities, but your company may issue securities. We have a free e-book available to teach companies about issuing securities through Private Offerings and Limited Private Offerings.

Your company should never conduct a securities offering without consulting a securities attorney first.

Public Offerings are available to companies listed on stock exchanges, Over The Counter Bulletin Board (OTCBB) or the Pink Sheets. This allows your company to issue securities at will (almost), and provides a method for your investors to sell them when they wan their money back (which differentiates them from private offerings and LPO's; these are known as "publicly traded securities".)

There are a few ways to become qualified to sell publicly traded securities, and there are many more registration, filing and reporting requirements than private securities or LPO securities. Your company may go through the "listing" process, or may become public through a reverse merger or acquisition by an existing public company. There are firms that offer advisory services to companies wishing to be listed on OTCBB and the Pink Sheets. Many can also provide guidance in reverse merger or public shell company acquisition transactions.

Your company should never conduct a securities offering without consulting a securities attorney first.

Be sure to register on FinancialArchitectSystem.com to learn more and receive your free e-book about how your company can raise money through private and limited public securities offerings.

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