Finding financing for a small business is like playing Where’s Waldo. Where’s Waldo is a game in which a player looks for a funny guy in a red-striped shirt and stocking cap in a maze. Waldo blends into the crowd and is difficult to find.
Small businesses look to find a source of financing among a maze of potential financiers and hazards. Financing can include angel investors, venture capitalists, banks, and other sources of equity and debt. Ma and Gui (2010) classified direct small business financing in the United States into venture capital and securities financing. Ma and Gui explained indirect financing comes from commercial bank loans. Some commercial bank loans have a government guarantee from the Small Business Administration. Mezzanine financing is another hybrid source of financing valuable because a company can treat much of it as equity even though it combines features of debt and equity (Silbernagel, Vaitkunas, & Giddy, n. d.). The maze is difficult to navigate because the terms differ from one source to another. The small business should target equity financing whenever possible because debt financing is more risky. Micro financing and crowd funding are some new entries to the maze, but an old favorite is bootstrapping.
A person playing Where’s Waldo has to examine the maze with great scrutiny to find Waldo blending in to the crowd. Waldo is a friendly guy, but is crafty in making himself inconspicuous among the crowd. Waldo may have hidden motives in avoiding making himself obvious.
A small business needs to have an awareness of the hidden motives different financiers may have. Some financiers use convertible features to gain control of a company. The small business should have an awareness of these features to prevent a takeover. Small business founders work hard to find a working model for their business and should protect themselves from possible takeovers by reviewing the terms of the financing. Protecting a controlling interest in the firm is a critical role for a small business founder to keep control and avoid the board from firing him.
When one finds Waldo, the game is over and the player can start a new puzzle. A small business founder looking for the right financing locates it the search is over, but he must remember to make sure the terms allow for keeping control of the company.
What sources of financing have you considered? Want to learn more about small business financing and how to preserve a controlling interest? Learn more.
Ma, J., & Gui, J. (2010). Study on the small and middle enterprises financing mode in financial crisis. International Business Research, 3(1), 76-79. doi: 2225515451; 56706961; 137934; NBRS; INNNNBRS0000568443
Silbernagel, C., Vaitkunas, D., & Giddy, I. (n. d.). Mezzanine Finance, from http://pages.stern.nyu.edu/~igiddy/articles/Mezzanine_Finance_Explained.pdf