How and where to get investment money that is best for your business depends on some assumptions. They include market demand, growth, willingness to take risk and how strong a business model is and how well the entrepreneur wrote the business model plan. Some of the many sources for capital are:

• Bank;
• Debt and equity financing;
• Government loan programs;
• Private placement;
• Initial public offerings;
• Angel investors; and
• Personal funds.

Bank Loans and Credit
Before any search for financial backing begins, a realistic business plan becomes essential. An outline for the topics to include has already been started by the United States Small Business Administration (SBA).

For a bank to evaluate the risk associated with your proposed or existing business, it needs facts and experience with your character. The character part of the equation means it's essential to relate well with one or more bankers.

An entrepreneur must also learn to think analytically about credit. According to the SBA, "nearly everyone looking for a loan learns the five Cs of credit":

• Character (how trustworthy you are);
• Capacity (your financial strength);
• Capital (the amount of your own money invested in the business);
• Collateral (assets available to back up the loan); and
• Conditions (the state of the economy and your industry).

Talking with a banker and communicating for a reasonable time leads to trust. Do not rush this. "The talk must be frank and open, even when reporting a negative development," Mitch Hurley, vice president and manager at First Security Bank of Utah, tells the SBA.

(For a quick and easy guide to working well with the bank, consider an article on the SBA Web site entitled The Benefits of Making Your Banker Your Friend, refreshingly written from a real world perspective.)

Before even thinking about starting on the path to forging a good relationship with a banker, ensure your credit rating is good. "First get your personal credit report," says the SBA. You can obtain a report by calling a credit bureau.

Equity Financing
Advantages:
• More cash on hand.
• If no profit comes in, you need not pay anyone.
• Profit need not go for repaying a loan.
• No need to worry about qualifying for a loan.

Disadvantage:
• You lose control of finances, creative and strategic direction.

Debt Financing
Advantages:
• You retain full control and ownership.
• The interest on business loans is tax-deductible.
• You gain an opportunity to start or improve your credit rating.

Disadvantage:
• You must relinquish some cash profits to cover the loan payments and interest.

SBA Loans
"The SBA acts as a guarantor for small businesses borrowing from traditional lenders." The higher your business cash flow, the better your chances are to secure a loan and earn the SBA's backing.

Private Placement
"Private placement or private investment capital, is money invested in your company usually from private investors in the form of stocks and sometimes bonds. In the U.S., private placement often does not need to be registered with the Securities Exchange Commission."

Initial Public Offerings (IPOs)
Filing for an IPO, a process governed by the U.S. Securities and Exchange Commission, requires you to provide a great deal of information about your business. You'll need audited records and a detailed description of your business. Since you're writing for investors who can sue you if you mislead them — for example — by being too optimistic about your company's prospects for success, you'll need legal advice.

Angel Investors
Once you have a viable product and you've fine-tuned your marketing and business plan, consider approaching angel investors or an angel group. However, funding a start-up for most of North American businesses comes from the founder's own pocket, not from angel investors.

Personal Funds
Nothing makes the point so well as a business plan based on some disruptive technology that has real potential as a commitment of personal funds. And when money from family and friends adds to the investment, then the message includes that an entrepreneur has successfully pitched the business plan to those who already know her or his character.

In addition to bootstrapping your company, getting family and friends to invest, IPOs and angel investors, there are regional development organizations with money to share. In Pittsburgh, for example, there's Innovation Works and Pittsburgh Life Sciences Greenhouse.

In reviewing the choices, entrepreneurs' decisions will often depend on timing, strength of the business plan, ability to communicate the upside, willingness to take risk, sometimes a willingness to give up some control and perhaps a little bit of luck. While there are many sources of funding, determining the one or combination that is best for your specific business can mean the difference between success and failure.

For tips and lots of other information related to raising money and controlling cash flow, check out the Startup Financing and Guides to Raising Money sections of Entrepreneur.com.

Resources

Write a Business Plan
United States Small Business Administration

Small Business Finance and Small Business Loans
U.S. Small Business Administration

The Benefits of Making Your Banker Your Friend
U.S. Small Business Administration

Small Business Administration Loan Programs Can Help Your Company Grow
by Tiare Rath
U.S. Small Business Administration

10 Tips For Starting A Startup
by John Foley
Information Week, April 11, 2008

Additional:

Guide to Resources for Starting a Business
by Daniel Kehrer
Work.com