You can look for money in all the wrong places. Or you can take our quiz
Most business owners know when their companies need money. But it's much harder for entrepreneurs to judge what type of financing is most realistic for their businesses. The capital markets can be confusing for small-business owners, so it pays to do your homework before trying to raise money. If you're in the market for cash--or just want to start preparing for future capital needs--spend 15 minutes on the test below.
For the sake of simplicity, we've included some broad generalizations about the levels and types of financing business owners tend to require. You may not find an exact description of your situation, but the quiz should help you clarify your needs and identify some of the most appropriate sources of capital. It might even spare you some snooty advice or painful rejections from the wrong type of financier.
Directions: For each question, select the answer that best approximates your current business situation, even if the details of your case differ. (If you're torn between two choices, choose the option with fewer points.) Then add up the points from your answers. Once you have your score, look at "Where to Look for Money," at the bottom of this page.
What Kind of Capital Should You Seek?
l. How much cash does your company need?
2. What can you offer investors or lenders?
3. Is your company's financial house in order?
4. Investors and lenders may scrutinize your personal finances as closely as your company's. How would you describe your personal financial condition?
5. How comfortable do you personally feel about raising capital?
Where to Look for Money
Raising capital for an entrepreneurial company usually isn't easy or fun. Neither is rejection.
To maximize your chances of finding the financing you need while minimizing the number of painful rebuffs you'll face, start with the capital sources that best fit your category, listed below. If your answers place you near the border of two categories, be sure to investigate both, with some guidance from your accountant and your lawyer.
25 to 40 points: Sorry. You're not really ready to tackle the formal capital markets. You could always try maxing out your personal credit cards, but that's a risky way to go. Your best bets are family and friends.
45 to 65 points: You're probably taking your first steps into the capital markets, but those first steps can sometimes pay off. Try a microloan program if any nearby banks offer one, or apply for seed capital from regional nonprofits with economic-development goals.
70 to 90 points: If you have a good banking history and some basic financial controls in place, you've probably got real options, especially if you're seeking a loan that can be easily collateralized. To increase your chances of successfully shopping for low rates and attractive terms, concentrate on banks with a strong interest in supporting your industry. If your company continues to prosper, your next step might be a well-heeled angel investor.
95 to 115 points: You and your company sound like the kind of entrepreneurial package private investors gravitate toward. So take an aggressive stand about seeking the kind of financing that meets your long-term goals. Private-placement deals offer a lot of flexibility and the potential to stay private if that's what you want. If you're interested in a future initial public offering, consider an association with a top-quality venture capitalist.
120 or 125 points: If your company's really as great as you say it is, you'll stand your best chance of raising a fortune by going public. Conduct a reality check first by consulting top-quality underwriting and investment-banking firms to make certain your corporate history, earnings potential, and personal style will get you the payoff you expect. Keep both your ego and your compensation in check, lest you alienate potential investors.