Small business financing can be tricky without professional help

Small business financing can be tricky because it is easier to raise $5 or 10 million than it is to raise $100,000 or $1 million

small business financing

There are several reasons why small business financing can get tricky:

  • supply
  • demand
  • availability of information
  • fees, and
  • experience

Supply – there are more big funds than small funds

In a big city like Singapore, there are more $50 million to $1 billion venture funds than there are $1 to $5 million angel funds. The reason is simple economics – the partners who manage big funds can earn excellent salaries from the 2.5% management fee. In a small fund, 2.5% barely covers the costs, which means the managers only real income is from their share of the 20% gains.

There are lots of individual angel investors but they usually invest relatively small amounts of money. That means a large number of angels are needed to complete even a $500,000 funding for small enterprises.

The number of small enterprises looking for funding is probably 20 to 50 times greater than the number looking for a $5 or 10 million VC round. The small funds and individual angels are usually deluged with requests for financing.

Availability of Information
Big funds have lots of money and less deal flow than they would like (these days). They all have extensive websites and often host industry events to maximize their profiles. They want to be easy to find, so they make information available. Angel funds are also reasonably easy to find, but are significantly fewer in number.

Angels are relatively numerous but most work very hard at maintaining a low profile – in part because so many small enterprises are looking for funding. It’s impossible to get a list of contact information for individual angel investors. This means entrepreneurs have to work much harder to find angel investors for their start-up funding.

The fees that are available to engage professionals are probably the biggest reason it’s easier to raise $10 million than $1 million. The costs to execute a financing are relatively constant as a percentage of the total financing. As the amounts of capital being raised increases, the process gets more efficient for the reasons described above, and the market rate for the financing fees go down a little. The total external fees for professionals assisting in an equity financing are usually in the ranges below.

Size of Financing$500,000 to $ 1 million$1 to 10 million
Fees as a percent of equity raised10 to 12%7 to 10%

If a company wants to raise $10 million from VCs, or public venture capital, the fees can be in the range of $750,000. The fees to raise $ 1 million are around $100,000. The problem is the small financing requires more work to complete than the larger one. As a result, there are not very many professionals who want to be engaged to facilitate a $500,000 to $1 million financing.

Compounding all of these other factors is the reality that the entrepreneurs working on their first startup funding are likely a lot less experienced than the entrepreneurs trying to raise a $10 million VC round.

In summary, it is really hard to get small business financing – even a great one. Most entrepreneurs need as much help as they can get from mentors, directors and professionals (if they can find them.)

Almost all public financings involve fees paid to professionals – usually licensed brokers. With private financings, fees paid to professionals are controversial. Many funds don’t like to see a professional charging a success fee to help complete an equity financing. Nevertheless, most entrepreneurs would complete financing faster, and with better terms, with the help of an experienced professional.

This is where an independent loan specialist maybe useful for you in your search for startup enterprise funding which is the right fit for your needs. Without any partiality, the independent loan specialist can compare a range of products and lenders. This will help you save time and money, avoid confusion, and improve your chances of getting approved, as well.

So if you are applying for small business financing, the lesson really is – never settle for the first offer you get as it might not be the right fit for you.

If your credit worthiness is suspect, getting start-up funding may be more difficult but certainly not impossible, especially if you have the right independent loan specialist to help you in your search. Ad the best news is, the services of an independent loan specialist is often free.

For starters, you should read up more so that you have some basic understanding of how an independent loan specialist can help you in your search for the right loan.

This is one good reason why you need to work with trusted loan specialists. Loan specialists are able to not only pre-qualify you with multiple lenders and compare rates and terms, they are also able to get you the best personal loans which has costs and payments that fit into your budget.

To lower the cost of borrowing, try to convince your lender to give you a better rate. You should negotiate with your lender and they may be willing to cut the interest rate to secure your business, and so the loan will cost you less. If you are uncomfortable about negotiating, you should engage the services of a loan specialist.

Loan specialists will not only be able to negotiate a better rate for you, they will also be able to help you compare the best personal loan offers from among the different ones given by the many banks. It also makes sense to engage loan specialists because their services are usually free.

It is perfectly normal for successful businesses to borrow money and be in debt. Also, borrowing money to make money is not really a new idea.

Written by Ravi Chandran

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