Content provided by the Connecticut Small Business Development Center
Finding funding for your business can be a challenge. However, money is out there! It may require creativity to bootstrap funding sources together, but it is possible to get your business funded in Connecticut. Here are 5 sources of funding:
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Personal investment
Almost all investors will want to see that you have “skin in the game,” meaning you have invested your own money in your businesses. Your own funds might include savings, credit cards, life insurance policies, home equity loans, reselling your assets something, bartering, or reduce spending.
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Family and friends
Family and friends is a classic example of raising funds from outside investors. Seeking capital from family and friends can be fast, easy, and may offer flexible payment. However, it can create complicated interpersonal dynamics and lead to unsolicited business advice from unqualified individuals.
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Crowdfunding
Crowdfunding has become a popular channel for raising money due to Kickstart and Indiegogo. It offers a great way to validate your business idea before investing a lot of money. To run a successful crowdfunding campaign takes a lot of hard work upfront, including developing a compelling pitch, spreading the word, and setting up incentive levels. Running a successful campaign requires (some) expertise; however, if done correctly, it can be an excellent platform to launch a company.
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Equity
Equity is money raised from the owners of the business and outside investors. Some examples of equity include common stock and partnership interests. Entrepreneurs who raise equity capital usually are seeking to grow and sell their business. Outside investors will want to know how much they need to invest, for what purposes and how soon they will get a return on their investment.
There are no collateral requirements for equity capital and repayment terms and conditions can be tailored to meet the needs of the business. Equity funds are sometimes called “patient money.” Payments can be put off until the business exceeds breakeven or reaches a certain level of profitability or even when the business is sold. However, investors usually seek 3-5 times their investment for moderate return and up to 10 times their investment for high risk. While investors usually do not want to run the day-to-ay operations of the business, they will seek a position on the board of directors where they can influence the decisions of the management team.
You should evaluate what your financing needs are and determine if equity financing is the right option for you.
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Debt
Debt is the most common way businesses are financed. This includes bank loans, government guarantees, lines of credit, credit cards, mortgages, notes payable, bonds, accounts payable, trade credit, home equity, and leasing contracts. Lenders will generally want to gather information that gives them insight into the business before they decide to make a loan.
Debt financing can be less costly than investors and allows you to retain 100% of your business. You can finance many aspects of your business including startup costs, equipment, furniture, fixtures, machinery, cash flow, and inventory. However, debt financing requires you to make constant and periodic principal and interest payments similar to a home mortgage. Repayment may disrupt the cash flow of the business but is a known and consistent cost. If the business is seasonal in nature or experiences a sudden downturn in sales, the inflexibility of a loan repayment can cause a sudden cash crunch. Make sure you develop a relationship with your banker and keep in contact with them in both good and tough times.
Some small businesses need capital less than $100,000. This level of funding is considered a micro-loan. Here are some microloan programs in Connecticut:
- Hartford Economic Development Corporation (HEDCO)
- Litchfield Hills Regional Microloan Program
- Community Economic Development Fund (CEDF)
- Connecticut Community Investment Corporation (CIC)
Connecticut also has several alternative sources of both debt and equity funding. Included are several city and regional revolving loan funds like:
- MetroHartford Alliance
- Northeast Connecticut Economic Alliance
- Middletown Business Loan Fund
- Middlesex County Revitalization Commission
- Waterbury Development Corporation
- Community Capital Fund
- Southeast Connecticut Enterprise Region
A quick note about grants: State or local governments might have grants or tax incentives available to new businesses, but those are few and far between, and generally require a significant job creation component and may include “payback” provisions if the agreed job number is not reached. Federal SBIR/STTR research and commercialization grants may be an option for some startups, and the Connecticut Small Business Development Center (CTSBDC) is poised to help with that application process.
There are a lot of financing options to get your new business or existing business funded. It’s important to work with a trusted advisor to sort through your options and help you determine your best financing strategy. The business advisors at the CTSBDC are well-versed in the capital landscape in Connecticut and have a proven track record of helping their clients get funding. In fact, in 2017, the CTSBDC helped their clients secure over $54 million in capital. You can sign up for no-cost, confidential business advising today at CTSBDC.com to get started creating your financing strategy.
