What is the Best Type of Capital?

Your business is much like your child; she starts small and is 100% dependent on you to take care of her every need. Your willingness to provide what’s needed, training, nutrition, protection, investments in her future, guidance, medical care and so on, and you find yourself amazingly excited to do it.  If your child was in need of a blood transfusion, you as a responsible parent would conduct a significant amount of research to find the right doctor, the right facility, the right method.  You would double check the source of the blood and talk with experts to make sure you eliminated as many risks as possible to protect your loved one.  Your business is much the same, you started small, provided everything it needed and a lot of nurturing, now that is has grown you need to provide for its future, it needs a cash infusion. Your business is a living, breathing, entity and cash is the blood flowing through the life of your business. This is the point in which many entrepreneurs make the mistake of taking the wrong type of capital in desperation trying to preserve all the hard work invested. Not knowing what effects taking the wrong type of funding will have.  If your child was given the wrong blood type or it was administered in the wrong method, you could have disastrous, long lasting ramifications; your business is no different. If you inject the wrong kind of capital and rush in without doing your due diligence, you may be faced with an even bigger problem in the near future.

The doctor, or capital source, is one of the most important aspects of long-term growth and health of a business, without it you may wither and die.  With the wrong type of capital, you may be restricted and unable to operate as you once did.  There are many capital sources each with its own set of benefits and shortcomings. Banks, private investors, asset-based lenders, venture capitalists are just a few of the sources in which you may be able to find the capital you need.  Any of these are viable resources if administered properly under the right conditions.

Questions you may want to answer prior to initiating a search for funding; what type of capital do I need?  What is the capital for?  How long will I need the capital?  Do I look financially weak or strong to potential investors?  Then, apply some common sense to your search, for instance if you are in financial trouble there is no sense going to a bank, you will just be wasting your time.  If you just need money for a special project (not long term), bypass the banks and venture capital and head toward private investors or asset based lenders.  The chart below shows how each type of capital source operates:

  Bank Private Investors

Asset Based

Lenders

Venture Capital Friends and Family
Rate Low Medium High High Low / Medium
Points Yes Yes /No Yes Yes No
Term Long Short Short Medium Short / medium
Flexibility No Yes Some No Yes
Equity No Yes / No No Yes Yes / No
Debt Yes Yes / No No Yes Yes / No

 

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