You are a budding entrepreneur with a relatively new business.  You know the odds of a new small business surviving beyond the first five years.  The statistics are not encouraging.  But, you know you can make it.  You simply need to find some alternative sources of funding.  So, what are angel investors anyway?

Angel investors are definitely a unique breed of individuals who take opportunities to invest in small business entrepreneurs. Sometimes, they are simply people you chance to meet who decide you might have a good thing going, so they put their own money into the pot.  At other times, a person may be actively searching for a good new business opportunity to contribute to, in order to help out new business owners.

Either way, these people are angels, because they are more likely to contribute to your success in the early stages.  Although they do expect a return on their investment, it is also understood that, like you, they are risking their own money in the hopes that this great idea of yours will blossom into a profitable business.

So, who becomes an angel investor?

•    Former CEOs
•    People with Common Goals
•    Helpful Opportunities

Essentially, an angel investor can be anyone who has capital to put into your business.  The backgrounds and types of people who choose to become angel investors are as diverse. Some angels may seem like a logical type to become a small business savior.  Others who are willing to believe in your small business enterprise will be an unlikely candidate for such a practice.

Former CEOs

For example, a retired business executive seems like a person who is more likely to find a small business and share their capital.  After all, he/she understand the inherent risks, and the whole gambit of profits and losses. With a good eye for spotting entrepreneurial talent, it would not be such a shock if this type of individual asked for an audience and handed you a check.

Common Goals

Similar to former executives, some angels share a common goal and want to help make sure you have every opportunity to succeed in your venture.  For example, what if your business deals with the development of new products and services for people who are legally blind?  Someone may want to help finance your research and development because he/she has visual problems or has a loved one who might directly benefit from your venture someday.

Business Opportunists

Probably the hardest angel to figure out is simply the business opportunists.  Without any rhyme or reason, someone has chosen to help you out.  For personal reasons only he/she understands, you have been chosen as a recipient of a capital investment.  In other words, as long as it is on the up and up, the investor may not have any agenda, other than wanting to help you out, and maybe make a little money in the process. What these business opportunists bring to the table may be a lot more valuable than money.

Angel Investor Value

If you are lucky enough to have a generous individual come knock at your business door with a check in his/her hand, do not assume money is all that is being offered to help you succeed.  You may also be the recipient of:

• Entrepreneurial Expertise- Your angel may have already been down the same financial and operational road.  He/she has insight to share to help you grow your small business, while avoiding the pitfalls that can slow down or ultimately kill your chances of success.  Someone who has once walked in your shoes can understand your triumphs and trials like nobody else.  You can greatly benefit from their experiences.
• Executives- Former business executives have a greater understanding of what it takes to make your business a successful venture. The advice they might be able to offer can be invaluable.  In these tough economic times, it may be the difference between you watching your dream venture fade or be a success.
• Wealthy Mindset- No, it is not just about the money.  But, people who have already been successful can share their thought processes and how they worked toward business goals.  Especially in the beginning, what was accomplished to make sure the doors stayed open and the customers kept coming back for their product or service?
• Other Angel Resources- Your angel may also know other angels who may want to invest in your small business enterprise.  As you know, it can take many investors and lenders to give your business the financial boost needed to grow. So, it can be a real asset to know about other angels.
• Potential Customers- Angels often know resources and people that will lead to potential customers.  Sometimes, they have the inside knowledge and understanding to lead you right to success.  In fact, it may be largely why they have the confidence you will succeed and give them a good return on their investment.

You may be blessed with a goldmine of information as well as small business financing. Take the opportunity to find out about your angel.  He/she may have the key you have been trying to find that will make your small business venture a true success.

Worldwide, the majority of new entrepreneurs get at least half of their small business financing through friends and family. Generally, it far exceeds any funding by investors or commercial lenders.  However, accepting financial help from those you care about the most should not be considered lightly.  According to the well-know quote by William Shakespeare, “for loan oft loses both itself and friend”.

Likewise, other experienced entrepreneurs will warn you not to go into business with loved ones.  Even in the best of times, relationships are a challenge.  But, make a mess of a relationship over monetary issues, and you both could lose something that money cannot buy.

So, before you even go knocking on any doors to discuss your business, you really need to carefully consider whether you should ask in the first place.

As you are contemplating the pros and cons of talking to friends and family about money, you need to first ask yourself 7 very important questions:

1.    Do they have the money?

You are not omnipotent or all seeing.  Are you sure your friend or family member has the money to invest in a small business. At one time they may have seemed flush with cash; but, maybe times have changed.  If you ask and your loved one does not have the money, or it is already earmarked for something else, it may put a strain on your relationship to even bring it up.  No one wants to feel like the bad guy and have to say “no”.

2.     What if you lose the money?

Despite best efforts, there are never any guarantees when you start a new business.  It is a gamble any way you look at it.  You can do all the preplanning and analysis known to man, and then the market turns and your dream hits the skids.

So, do you friends and family understand that there is no way to promise they will get their money back and then some?  If they lose their investment, will it adversely affect your relationship?  Can they do without that money forever, if things do not work out?

3.    What is your attitude about the money?

Be honest!  Do you feel like you are entitled to that money?  If you ask your parents for the capital to start your business, is it going to cause problems between family members?  Are your siblings going to be upset, if you get a handout and they do not? Even if you feel like your parents owe you money, they may not have it to give.

4.     How will you pay it back?

Every new business goes through periods of famine, when there is more capital going out than coming into the business.  If times are tough, are you going to treat friends and family like a creditor and make the agreed upon payment; or, are you going to let payments slide because they will not destroy your credit like a commercial lender?  You will need to get it in writing as a contract.  Make the transactions legal, so loved ones do not feel like you are simply taking advantage of their generosity.

5.     Could you permanently lose a friend or destroy family ties?

Many relationships have been destroyed over money.  Is it worth the risk?  What if your friend or family member does not truly understand the nature of the loan?  He/she might assume that in a year’s time there will be a substantial return on their investment.  If it doesn’t work out that way, will feelings be hurt beyond repair?  You must count the cost.  It has far-reaching consequences beyond the money.

6.     What is the money?

Is the money a gift?  Is it a loan?  Is it your Inheritance given while you parent(s) are still living?  The source of the money should be very clear.  Then, make sure to get the transaction all down on paper.  Even though it comes from a friend or a family member, use legal documentation.  Whether it is a week, a year, or 20 years from now, there should be no question regarding the money.

7.     Are you going to protect their investment?

When it is your own money you invest in business, you can spend it as you see fit.  However, if you are taking money from friends and family, are you going to protect their money to the best of your ability?  In other words, are you going to be a little more careful how you spend the money? In fact, it may be a good idea to have an itemized list on how their small business investment will be spent.  Is it to pay employees, buy a new piece of equipment, and increase the inventory or something else?

Before you borrow money from friends or family, be sure to count the cost.  It could mean a lot more than simply returning their money and giving them a good return on their investment.  A small business loan or an entrepreneurial investment is not worth risking a loving relationship. So carefully consider small business financing from friends and family.

Acquiring financing can be one of the most challenging aspects of starting a small business. You have a vision.  You have done all of the research.  You know exactly how much money you need, and how it is going to facilitate business growth. But, you have to convince investors or lenders that you entrepreneurial endeavor is going to take off, and you are worth the risk.  On the other side of the proverbial coin, you need to be aware of the small business financing risks involving angel investors.

The best kind of angel investor is the person(s) that advance you the necessary money and leave you to use the money as needed.  You make all of the decisions; you have control of the money; and, you angel sits back and waits for a return on their investment.  They understand the potential risks and benefits of helping entrepreneurs.

However, not all investing angels are simply content to try and get in on the ground floor of a potentially successful venture and sit back and wait for the profits to start rolling in as another source of income. Some people feel entitled to get to close and cramp your style.  In some cases, it can be a blessing; in others, it can be a curse.

How you feel about your angel depends on your personality and expectations.  But, you simply need to be aware of the various relationships that can develop after you are given money.  Then, you can decide whether the benefits are worth the risks.

Dark Angels

Beware of the dark angels.  If you get involved with an angel of this caliber, your entrepreneurial dream can turn into a nightmare.  Yes, you will receive the money needed for you small business; but, strings will be attached that you may not necessarily be aware of, until it is much too late.

While you are struggling down the path to a successful business, your angel may be a regular presence or sitting in the background waiting for your product or service to start generating significant profits.  Then, your dark angel will swoop in, taking over the business, and leaving you wondering how your venture now belongs to someone else.

Before accepting money from any lender or investor, make sure you understand all of the fine print.  If needed, you should hire a small business lawyer to go through all paperwork, before you sign on the dotted line. Never assume that you angel always has your best interests at heart, in addition to their desire to make money.

Mentor Angels

Mentor angels are truly the best kind of angel you will find to invest in your small business.  They have a genuine interest in helping you succeed.  Most have walked many miles in your shoes, and know the challenges you will likely face as a small business owner.  Mentor angels are great cheerleaders, and they can be valuable advisors, especially during the time you are trying to get your business off the ground.

But, if you are the type of person that does not take constructive criticism or advice well, you may not want to ask a mentor angel for money.  Even though their intentions are totally honorable, it can make for a very strained relationship, if you already have a business plan and prefer to always do it your way.  In other words, if you sink or swim financially, it will be thanks to you and no one else.

Inheritance Angels

Inheritance angel investors should be approached with caution.  While they may have recently come into some money, many have no idea how a small business becomes a profitable venture.  Thus, they may have unrealistic expectations regarding the return on their investments.

Also, since they are your angels, they may feel like they have a right to dictate how you run the business.  Unfortunately, all of their ideas are not grounded in experience. While they may simply be trying to be helpful, it can be a thorn in your side, when you are striving to implement your own business plan. In other words, you are not looking for a partner, and you certainly do not need the added responsibility of schooling someone in the finer art of business, because they feel entitle, due to their riches.

In short, angel investors are a great resource for small business financing.  However, before cashing that check, you need to understand where your benefactor is coming from.  Is it someone who understands business investment risks, or is it a person who has unrealistic expectations for a return on their investment?  Is it an individual with business experience who will be a little too helpful, or someone who plans to take over once you have done all of the hard work? Angels can save your business, but you need to know the small business financing risks involving angel investors.

One of the first decisions an entrepreneur has to make is determining how to finance a business.  Especially in the economic world today, it has become increasingly difficult to secure a loan large enough to get a business of the ground. You may need to develop several different resources for starter capital. For example, you may need all six different ways to finance your business.

With unemployment rising and more people afraid to spend their money, your business will have to provide a product or service that is recession-proof. Then, you will have to come up with a sure-fire business plan. You will need a realistic view of your financial goals, and exactly how your venture will surpass the competition.

To begin, you have several options, when it comes to providing business capital:

•   Personal Contribution
•    Lenders
•    Investor Partnership
•    Money Management
•    Business Grants
•    Subsidize

Of course, some financing options are preferable to others.  So, you will have to consider your personal and business goals when choosing the best way to finance your business.

Personal Contribution

If you want your business to be successfully financed, you must be willing to put a significant portion of your own money on the line.  Think about it!  Except for people in your inner circle, who will be willing to invest in your business, if you do not have enough faith and confidence in your own professional success to save, alter your lifestyle, and make the sacrifices needed to ensure your business has the capital needed to become a thriving enterprise?

However, if you have enough faith in your chances of small business success, investors and lenders are more likely to consider you a good financial risk.  The whole idea in giving you money is to make an investment that will eventually make more money.

Lenders

Lenders for your small business can come from several different sources.  For example, if you have friends and family that believe in your ability to succeed, they might decide to invest in your small business, mostly to help you out.  However, even loved ones would like a return on their investment in your business future.

Of course, you can also apply for a small business loan.  However, with the economy on shaky ground you need to be prepared for a lot of red tape and extra effort on your part to prove your idea as a potentially successful business venture. In addition, the interest rate is likely to be hirer than anticipated.

Another option is a line of credit, such as a charge card.  However, the interest rate will probably be extremely high.  Unless your business shows a significant profit in the first quarter, the interest charges alone can put you in the poorhouse and create a small business risk.  Therefore, this option is not recommended and should be used only as a last resort, for a small amount.

Investor Partnership

Some small business owners have partners who are willing to invest in their small business idea.  While this can be a win-win situation for all concerned, it is not without significant risk.

For example, does the future partner understand the benefits and risks of their investment?  Do they have a realistic expectation of small business profits?  In other words, are they going to have the patience to give your time to become successful?  If he/she wants out of the business, will you be able to buy them out, or will your small business fail?  You will have to ask yourself all of these questions, and more, before taking on a partner-silent or otherwise.

Money Management

Small business money management is another way to raise capital for your business.  For example, you might simply have to save the money needed to start your small business.  Forget buying that new car; downsize and move to a smaller home for a cheaper mortgage or rent. Essentially, be more frugal in every area possible, and put the money into your business.

Also, you can barter with other businesses.  For instance, you might have a service they need and they have a product necessary for your business.  You trade one for the other.

Business Grants

Of course, you can apply for small business grants. You will have a better chance at receiving a grant; if you have a non-profit business, or you can prove your business with contribute significantly to the community.  Unless you have applied for grants in the past, you will probably need to hire professional help to compose the grant properly.

Subsidization

Someone may subsidize your small business, without requiring partnership, if they will profit from their generosity.  For example, your employer or someone else might believe in your entrepreneurship and want to give you a positive start.

In short, you have several ways to finance your business. Which options work for you depends largely on the type of business, the startup capital required, and the business plan you present to lenders and investors. Ultimately, your success will be largely determined by your perseverance.

Before you can ask lenders or investors for capital, to get your enterprise of the ground and on the way to success, you will be personally investing in your small business.  In fact, most of the money needed to start your business will come from deep within your own pockets.  So, before you can seriously consider selling a product or service, you will have to sit down and consider your financial health and how much money you have to sink into your business.

Your Bank Account

In the beginning, about 80% of all entrepreneurs will delve into their personal savings and bank accounts, to start their small business.

So, you are definitely not alone!  Maybe you have been saving for years, while working for someone else, with the notion of becoming your own boss some day.  Maybe you have inherited some money and decide this is a golden opportunity to make a dream become a reality.  Either way, if you really want to finance a small business, you are going to have faith that what you have to offer in products or services will sell and put your own money on the line.

Collateral

Even if you have been saving for years, and think you have enough money to keep a business going, until it starts showing a profit, you may be surprised. Paying employees, the location, equipment and supplies, or whatever you need quickly adds up.  Your ready cash is already in the business and now you need the collateral to get a small business loan.

But, where are you going to get the kind of money?  For many small busy owners, the answer lies in the roof over their heads.  If you own your own home, and have significant equity, you might be able to acquire a home equity loan.  However, especially with the economy weak in this area, the bank will need assurance that if you default on the loan that they will be able to get their investment back by selling your home.

So, you will have to get an appraisal on your home.  In most cases, a lender will want you to at least have 50% equity in your home.  Of course, you will now have to subtract the cost of the appraiser.

Unfortunately, there is definitely big risk in putting your home up as small business loan collateral.  If your business should fail to withstand the pressures of hard economic times and the competition, you will not only lose your business, but your home as well.  You will definitely need to weigh the risks against the benefits.  Plus, if you are married, you and your spouse should be in total agreement that this is the way to finance your small business.  More than one promising entrepreneur has lost everything, including family, when their business has fallen on hard times.

Credit

If you have excellent credit and can show yourself to be a good credit risk, you might be able to use the leverage to get a business loan.  But, if your business is just starting out, this may be an impossible task, because you have no credit history on which to lean.  But, if you have already been in business for a couple of years and need some capital to expand or invest in new equipment, you will definitely have a better chance of getting a loan. In short, the facts of your business will speak for you.

Loans

Many entrepreneurs depend on small business loans to keep their business growing.  The loans may be short term, until purchase orders are paid, or projected income is realized.  Conversely, it may be a long-term loan in order to expand the business or renovate to bring in more customers.

Generally, if you get a loan, it will come from one of two sources:

•    Commercial Lenders
•    Friends and Family

In either case, getting a loan has its own risks and benefits to consider.  So, you will have to be very confident that the loan can be paid back as agreed, or it can do irreversible damage to you both personally and professionally.

For many, commercial lenders are the only way to get a small business loan. It is all about crunching the numbers, going through a business plan, and assessing the credit risk.  It is all kept professional and straightforward.

However, if a commercial loan is not possible, you might need to turn to friends and family for small business financing. But, for the sake of your personal relationships, treat it as you would any other business transaction.  Get the terms of the loan down on paper.  Many a relationship has gone south when financing a small business has crossed the line between love and loan.  So, whether the loan is commercial or personal, make sure the terms are written down.

Well, now you know at least four ways to use your own money to invest in small business.  None are without a certain element of risk.  So, it is extremely important to weigh the pros and cons, as well as consider alternative financing, before signing on the dotted line.

Your community probably has several people who are looking for opportunities to help entrepreneurs realize small business success.  Some may be searching for individuals just like you; others may simply have their eyes and ears open to any new investment opportunity.  It is simply a matter of making sure you and your potential angel meet.  You need to know how to find angel investors for your business.

You might be lucky enough to have your angel drop on your doorstep and suggest some sort of business deal.  However, in many cases, they are looking for entrepreneurs just like you, and you are looking for investors just like them.  It is not happenstance that you and your angels get together and talk.

Unfortunately, by the time you realize that you are in need of an angel investor, you have probably already been turned down by lenders and other resources for small business capital. People are leery to give you the seed money, or invest in a new business, because the risk that they will not see an adequate return on their money is greater.

On the other hand, angel investors generally like to get in on the ground floor-so to speak.  They know it can be a challenge to find adequate financing, and they genuinely want you to have the chance for small business success, even if the venture may be riskier at this stage of the game.

But, angel investors are not accustomed to simply throwing their money in any direction and hoping the money returns will boomerang back to their pockets.

  Angels do have specific criteria to be met, before handing you a check:

1.    Location
2.    Your Business
3.    Investment Size

Everybody is different.  Your guardian investor may have a different reason for wanting to help you out, but these 3 criteria are often important.

Location

Chances are good an individual will want to support a small business that is going to be close by and an asset to the community in which they live.  Do not make the mistake in assuming these types of people are going to walk away and not give your business a second thought, until the residuals start showing up in their mailbox.

Quite the contrary!  If you are worthy of investment, you are important.  Your success is also their success.

Your Business

Angel investors will often pick small business entrepreneurs that are providing a product or service of personal interest and knowledge. Oftentimes, they want to be able to help by providing advice and guidance based upon their own experiences. Giving your business the chance to succeed is much more than a monetary investment in a small business.  They too have a heart and a belief in what you are trying to accomplish.

Investment Size

The criteria for investment, for some angel investors, are simply the size of the investment needed.  Maybe they know you need a good chunk of money that no lender will okay, because you are still too much of a risk.  Conversely, maybe they are a small investor, or a member of a group of angels, who do not have a lot of money to give you, but understand that every little bit helps.

So, now that you know there are angel investors out there, and the basic criteria they are looking for, you simply need to get together, so you can talk business.

If an individual has not found you first, there are several things you can do to make your business known:

1.    Networking
2.    Media
3.    Events
4.    Angel Lists
5.    Internet Services
6.     Referrals

As you can see, many of the same key activities that will bring customers or clients to your door will also attract angel investors. You might be able to accomplish advertising and investor attraction simultaneously.

As far as gaining local investors in concern, networking is similar to that of Internet enterprises, but not quite.  Networking via the Internet is intertwined with blogging, social sites like Twitter or Facebook and creating links back to your business.

In essence, you are doing the same thing in your community, but in person.  Maybe you go out for coffee in the morning and meet with other business people.  You make your business known around town through socialization and depend upon word of mouth to promote your small business venture.

Of course, you can also use the media and special events in the community to sell your ideas to potential investors.  For example, you may want to attend a trade fair.  It would be a logical place for angels to come looking for you.  You might also find an investor through lists that might be provided to colleges, universities, and community service programs, for the sole purpose of connecting budding entrepreneurs will financial assistance.

You might also be able to find assistance on the Internet.  Services are available specifically for helping small business owners and potential investors meet up with one another.  However, even with all the advances in technology, nothing can beat the most basic of financial resources-referrals.  Your reputation, and that of your guardian angel, will become known, and referrals can be a financial life saver.

So, now you know what angel investors are look for in small business ventures.  You have some ideas for attracting their attention.  Now is the time to develop a plan and get busy finding small business financing.

Since the dawn of self-owned businesses, investors have been a necessary resource for helping the business grow, or simply keeping the doors open in hard economic times.  Most have reasonable expectations for a return on their investment.  However, others can be wolves in sheep clothing.  You should know the various types of benefactors and learn how angel investors can make or break your small business.

First, if you do not know what an angel investor is, he/she is usually willing to get in on the ground floor of your business and lend you the money needed to keep up with the competition and become successful.  Although most understand the risk of potentially losing their money, Angels have the hope that their faith in you is well-founded, and they too will make money in the end.

 
However, every angel has his/her own reasons for helping you in business. So, it is important for you to be able to identify your angel, in order to benefit from their strengths or back away from their weaknesses.  For example:

• Tech Anelg-if you are providing a product or service involving new technology, you are liable to attract the tech angel.  He/she may not necessarily be a financial whiz, but this individual is looking for a way to get in on the ground floor of promising new technology.  Like the other angels, making money is surely of interest, but promoting new innovations is a passion.
• Silent Angel-the angel with this personality does not really care to see how you conduct business from day to day, or offer any helpful advice.  He/she simply wants to make a sound investment and hope to make a significant amount of money in the end.  For example, individuals who bought stock in Microsoft when it was just a fledgling company are well off today, because they saw promise in the new business and had hope to get an adequate return on their investment.
• Lender Angel- He/she likes to lend money to promising entrepreneurs.  Looking for deals, it is common to encourage other investors to toss their two cents into the business as well.  Enthusiastic, he/she is good at spreading the word, whenever you need some cash to expand the business or keep you afloat until customers pay their bills.
• Grandfather Angel-The patriarchal angel is much like the lender angel in the aspect of getting other angels involved in your business.  However, he/she has been investing in people like you for a long time.  Successful and experienced, a grandfather angel has a lot of influence in convincing other investors to take a chance on you, or to walk away.
• Inheritance Angel-Basically self-explanatory, the inheritance angel has recently come into some money.  However, he/she does not want to squander the money.  Instead, investing the money, in hopes that it will grow is the goal.  While some may be business savvy, others simply are hoping to have received good financial advice.
• Newcomer Angels-People new to the world of investing in small businesses have come into money.  They get together as a group and find a mutual cause to pool their money and invest.  Oftentimes, it is a one-shot deal.  They do not usually make it a practice to become investment angels.
• Do-Gooder Angels-Generally, these angels want to invest in small businesses or companies that provide a valuable service for the community or mankind in general.  For example, if you are researching and developing a new drug to fight cancer, or your business will benefit the community in some way, do-gooder angels want to help make sure you get the chance to make a difference. So far, all of the angels are basically good.  Yes, they want to make money.  But, they also want to help someone with vision to succeed.  But, not all angels are simply out to get a return on their investment, or give a new entrepreneur the opportunity to prosper.  Some have ulterior motives that can kill your dream.
• Dark Angels-Individuals who have underhanded motivation want to use you to further their own agendas only.  They keep their toe in the proverbial door.  Once you start enjoying a modicum of success, these people muscle their way in, and they literally take over the business.  You have done all the hard work of laying the foundation.  Then, they come in and reap all of the profits.  Before you know it, you are on the outside looking in, and wondering how your dream now belongs to someone else.

In short, the world is full of different people, with different personalities, experiences, and goals, who will be willing to become angels and invest in your business.  However, as the businessperson, you need to be able to identify you angel, so you know what to expect and can protect yourself against the investor that wants to steal your success.

Especially in hard economic times, finding investors and lenders to support your business can be extremely difficult.  So, instead of giving up on your dream, you are considering alternative sources for funding your small business. You do have other options.  But, before you make any financial business decisions, it is important to understand the pros and cons of alternative business funding.

The financial decisions for your small business made today can have long-term affects for tomorrow.

So, you need to make well-informed choices, especially if you are considering non-traditional business financing via:

•    Customers
•    Purchase Orders
•    Credit Cards
•    Alliances/Mergers
•    Leasing vs. Buying
•    Employee Stocks
In brief, you can get some idea of how alternative money sources can work for small business.  But, it would definitely be advisable to seek professional counsel and consult your business lawyer.

Customers

Having multiple sources of financing is a good idea for small businesses, as long as you are fully aware of how the arrangement and payback will work.  A prime example is your customer.  For purposes of example, pretend you own a soda factory.  One of your best customers has a fast food chain that counts on your marvelous beverage for its customers.

However, you have a vital piece of equipment that needs to be replaced, if you are to stay in business.  So, you might go to your customer, explain the situation, and offer to provide free product until the cost of the machinery is paid for in full.

For many small businesses, developing a mutually beneficial relationship with other entrepreneurs is great.  But, you also need to make sure the details of the exchange are reasonable and down on paper.  Why?  What happens if you client decides you should substantially increase you monthly supply of soda?  In fact, if you acquiesce to their new demands, you will not be able to supply your other clients, pay your employees, or invest in the invention of new flavors.

Customer financing can work, if you treat it as a legal transaction. You simply need to protect your interests as well as maintaining a good relationship with your customer.

Purchase Orders

Purchase orders are already money that is destined to be paid to your business. So, how can they be an alternative source for funding?  If all of your purchase orders were paid in full, you might not need money for your small business.

In this case, your bank, with whom you have already developed a good business relationship, will consider your income ability based upon your stack of purchase orders.  Then, the institution might loan you money to increase your inventory or do something to improve your business, while you are waiting for those purchase orders to be paid in full.

The loans are generally short-term and carry a hefty interest rate.  So, careful consideration is important.  If your vision shows your small business growth changing substantially for the better, because of a purchase order loan today, then it might be well-worth the risk.

Credit Cards

Using credit cards to fund your small business can be extremely risky.  But, if you are very good at managing your credit, and know it will only be a temporary solution, until customer payments arrive, it can be done.  However, you should know that the interest rates can be almost 25% of the total purchase.  It is not quite like seeking financing from a loan shark, but it can feel like it, if you are not extremely careful.

Business credit cards can be great, if you know you will be able to pay off the balance in the next month or two.  Otherwise, the high interest rate can bankrupt your business.  However, if the account is used often and paid in full every month, it is a great way to gain frequent flyer miles for cheap/free business trips.  Simply be careful.

Alliances/Mergers

If you feel like your business is drowning in the flood of competition, a merger or alliance can be beneficial.  But, you role as owner will drastically change.  In fact, if you merge with a larger company, you may simply be bought out and lose your business dream altogether.

If you want to keep up with the large competitors, and still maintain some measure of your dream, you might be wise to create an alliance or merger with another small business.  Then, you can battle the larger competition together, and still have some control over your small business venture.

Leasing vs. Buying

Another alternative source for funding is simply to lease your building or equipment.  In the end, it may feel like you have paid more than necessary for your business needs.  But, it can help free up the monthly cash flow needed to grow your business.  Someday, you can invest in your own equipment and building, after you have experienced a modicum of success.

Employee Stocks

Today, many businesses are turning to employee stocks to help finance the venture.  Employees are offered the opportunity to essentially buy into the company that gives them grocery money.  Sometimes, stocks are in lieu of a raise or a bonus.

In tough economic times, it might be the alternate source of funding that keeps the business doors open.  The employees are willing to sacrifice a little because they now have a vested interest in a piece of their company; and they get to keep their jobs.

So, if any of these alternative sources for financing your small business sounds viable to you, discuss your options with your business lawyer. You can keep your dream enterprise alive.

The old saying, “It takes money to make money” is true.  Whether you have the traditional brick and mortar business with a street address, or you are an Internet entrepreneur, you will have to use some capital to get started and stay competitive.  But, you are not alone. Other enterprising people have gone down the same road you now travel, and they understand the challenges you face. Thus, you have 4 ways to finance your small business.

Financing your small business rarely comes from only one source. Unless you have inherited a thriving business, you will probably use most, if not all 4, of the following options:

1.    Your Own Money
2.    Friends and Family
3.    Commercial Loans
4.    Private Investors

To limit yourself to only one or two financial business resources can make or break your entrepreneurial dreams.  In addition, it can restrict your ability to stay competitive or achieve true success.  So, it is important to be open-minded and consider all your financial options, when the need arises.

Your Own Money

Before you ever ask anyone else for help, you better be prepared to finance your small business with your own money.  You cannot expect other individuals or businesses to make any financial risk on your enterprise, if you do not believe it will be successful.  So, if you have not put yourself in any financial risk, do not expect others to hand you a check.

For example, your savings will probably be the first to be depleted.  If you have a bunch of money in the bank, why do you need assistance from other resources?  You might even have to get rid of the fancy car and drive a second-hand auto for a few years.  You will probably have to postpone the family vacations for a year or more.  Even shopping for groceries might have to include no-name brands, clipping coupons, and foregoing the tasty little extras.

If you really have faith your business will become a profitable success, the sacrifices you will make today will be easier, because you know your personal and financial goals.

Friends and Family

Much of small business capital comes from friends and family. People you love will often share your dream of entrepreneurial success.  They would like to be in on the ground level as investors; but, they are also willing to risk money because they believe in your ability to succeed.

However, you need to approach friends and family carefully.  Do they really have the money to spare, without putting their own families in financial jeopardy?  Will there be hard feelings, if something goes wrong and they lose the money?  Do they understand that profits will not magically appear overnight, and you might have to turn right around and reinvest some of the proceeds, in order to expand?

Finally, even if they are loved ones, do not take money from people in your inner circle without getting it down on paper.  Make some sort of signed contract, so there is no ambiguity, if relationships should become strained later on, or to prevent them from becoming strained in the first place.

Commercial Loans

Especially if you have achieved a modicum of success, you may want to consider obtaining a small business loan through a bank.  However, you need to be aware that the finance charges can be large, and the consequences can be devastating, if you default for any reason.  Some self-assured entrepreneurs have lost their business, their home, and their families, because they put everything on the line without fully counting the true cost beforehand.

Generally, you will not be able to obtain commercial loans, unless you are willing to sacrifice enough collateral to satisfy the bank.  A lien will probably be placed on your house, or you will have to take out a second mortgage.  If your car is paid for, it might not be anymore.  Frankly, you will need to consider all your options from a business standpoint and leave your heart at home. Count the cost before you sign on the dotted line.

Private Investors

Another small business financial resource is private investors.  Also known as angel investors, people you may not even know may be interested in helping you achieve financial success.  In short, your success is also their success.  But, they are also cognizant of the financial risks of investment.

Many private investors have been small business entrepreneurs at one time.  Thus, they are simply interested in helping other hard working people succeed.  Others want to get in on the ground floor, with the hope that you will become the next Bill Gates and make them rich.  Either way, they know it is not a sure deal.

In summary, your small business needs capital, whether it is paying for a website, or you are starting a traditional business in your town.  Naturally, you will throw your own money into the pot.  But, if that is not enough, you may need to seek help for your small business from friends and family, angel investors, or commercial loans.  If and when your entrepreneurial dream is realized, you and your investors will achieve financial success combined with personal and professional satisfaction.

As an entrepreneur, you will have many challenges as a small business owner.  Whether you are the boss, staff, and cleanup crew all rolled into one, or you have a handful of employees under your tutelage, you will be faced with many challenges to make sure the business becomes a profit-making venture.  But, one of the major concerns will always be money.  Are you making enough, and how much money do you need to make a bigger profit?  You will always be aware of why you need small business financing.

In the Beginning

For you, maybe you will need more small business financing in the beginning of your venture. Start up costs can be a deal breaker, unless you can acquire financing for your small business.  Whether you have the traditional brick and mortar business, or you have an Internet-based product or service, it takes money to get started.For the Internet entrepreneur, small business expenses definitely include a website.  Unless you are really computer savvy, you will have to pay a web designer to build the site to your specifications.  In addition, you will have web host fees.  Plus, you will have to pay for your domain name, or another Internet entrepreneur can take it from you and make it his/her own.

Also, unless you are a writer, you will need to pay for advertising via the Net. For example, you will need Web content and article marketing to give your site links and back links. Then, you will have to pay for the product you sell, either as a shipper from your home, or the privilege for being an affiliate marketer.

For the traditional brick and mortar business, you will have to rent or buy the facilities for your business.  You will also need a small business license to sell products or services in your community.  Of course, you will need furnishings and equipment.  If you are a Mom and Pop small business, you will not necessarily have to pay employees, but you will probably have to hire someone to keep the books and manage marketing or advertising.

Depending on the business, you may also need to hire a business lawyer and a tax consultant, to make sure everything is running smoothing in the financial department.  Bad books, even with the best intentions, can break a small business, if you are audited.  Unfortunately, ignorance will not be an excuse.

Time to Expand

If your business is going well, and you have decided it is time to grow and expand, to improve your profits, you will probably need small business financing to make your vision a reality.  It real does take money to make money, unfortunately.

For the Internet entrepreneur, you may want to have more than one site and multiple streams of income.  But, you are only one person.  It takes a lot of time to do everything necessary to make a website profitable.  You may need to start outsourcing some of the vital tasks.  However, if you hire a contract freelancer, you do not have to worry about paying employee benefits.  But, it still takes money.  You might be able to hire an overseas freelancer for cheaper fees.  However, you also get what you pay for, so sometimes it is worth paying someone with an education a decent hourly or price per item wage.

On the other hand, if you have a business with a street address, you will need small business financing to expand the store.  It might require building on to the existing building, or you may have to change location.  Of course, advertising is necessary with expansion.

You might also need to hire additional employees to man the new facility, and meet the needs of a growing customer base. As more people spend their dollars on your product or service, you will need to increase your inventory, or buy more equipment to provide your service.  In the end, expansion may be a great business move, and your profits will increase, but you need the capital now, in order to grow.

In Hard Times

Generally, most businesses struggle at one time or another.  For some, it is either feast or famine.  In the lean times, it can be very hard to keep your doors open, whether it is a virtual or physical door.  In truth, 50% of small businesses close within the first 5 years.  The competition is tough and it is simply hard to sustain any meaningful profit.

But, to weather the hard times, many entrepreneurs seek a small business loan, or an angel investor, to keep the doors open, until the tide turns again.  If the lean times are part of the normal ebb and flow of profits, lenders and investors can help you survive the lean times.  Then, when the good times are back, you can afford to give investors a return on their investment and pay off any loans early.

So, whether your business takes off like a rocket and you are on your way to becoming a millionaire or you have to struggle in order to make your dream a reality, you will need small business financing at one time or the other. The key is to understand why you need the money, and the best way to receive and use that money to benefit your business.