The past several months, I have discussed sources of funding for starting and continuing entrepreneurial ventures. While banks, venture capitalists, angel investors and crowd funding are ways already discussed, none of these are the most common ways most businesses are funded.
Most businesses rely on the owners' savings and money from friends and family to finance their ventures. A poll of the 2013 Inc. 500 members showed 71 percent primarily used their own savings and 21 percent borrowed from friends and family to start businesses. Only 13 percent borrowed from a bank and only 15 percent used money from venture capitalists or angel investors. None in the Inc. 500 had used crowd funding.
The reality is, many entrepreneurs have to use their own resources. They do not have the collateral, credit rating or a really innovative idea to attract investors. The advantage of this approach is the business is not in debt to anyone or forced to share ownership with anyone else. The entrepreneur can focus on starting the business instead of raising funds.
The downside of bootstrapping, as this approach is commonly known, is the entrepreneur often lacks sufficient funds to start or maintain the business. This can lead to failure. Near the top of most lists of why businesses fail is a lack of funding.
An alternative to borrowing from friends or family is to offer them equity in the business. But keep in mind offering ownership opens the possibility of these investors wanting to provide their advice and ideas about how to run the business.
Bill Auxter of the Ohio Small Business Development Center in Fremont suggests doing business like this is not such a great idea.
"I discourage my clients from using family and friends for business funding for all the obvious reasons. But if they do, I stress to them the importance of treating this type of funding as you would a formal finance deal ... agree on the terms and have a formal contract drawn up by a qualified attorney," he said.
Perry Haan is professor of marketing and former dean of the business school at Tiffin University. He can be reached at (419) 618-2867 or firstname.lastname@example.org.