It is important to note, however, that owning and operating a business involves ongoing challenges at every stage of the venture's life. As might be expected, those challenges are often financial in nature.

Three periods where business owners are frequently faced with financial challenges are during the start-up period, through the survival stage and through the initial growth stage. Each stage raises different challenges and, as might be expected, calls for different solutions.

The Entrepreneurial Advisory Services Team at Coopers & Lybrand, a big accounting and management consulting firm, has spent a lot of time examining each of those business stages, the problems faced by business owners during those periods, and the kinds of solutions that have proved most successful.

Much of the information used by the consulting firm's entrepreneurial experts is gleaned from the company's Trendsetter Barometer, an ongoing poll of chief executive officers of 328 manufacturing and service companies identified in the media as the fastest-growing U.S. businesses over the last five years. The surveyed companies range in size from about $1 million in annual revenues to about $50 million.

In the first stage, the start-up period, the primary source of funding is most often the entrepreneur's own resources, along with a little help from family and friends. More than 70% of the growth companies surveyed by Coopers & Lybrand used this method of financing.

Of the 29% that were funded primarily by outside sources, investors provided the capital for 13%, 8% used bank loans, and another 8% turned to alliances with suppliers or customers to get their ventures afloat.

"At the earliest stage of development, a company doesn't have a history of success needed to secure financing from formal lending institutions," says Roger Knight, a director in Coopers & Lybrand's mergers and acquisitions group based in New York City.

INTERNAL SOURCES

"Equity sources, such as venture capital firms, earmark a majority of their funds for high-profile, high-profit ideas with fast-growth potential," Knight says. "Unless your business is part of a large organization or in a high-technology or biomedical field, its seed financing is most likely to come from internal sources -- such as savings or mortgages -- family, friends or local business associates."

Not only do first-time entrepreneurs have to figure out where to get funding, they also have to decide how much they will need. Trendsetter Barometer found that initial funding requirements ranged from a median low of $60,500 for service firms to a median high of $119,500 for product firms. Of course, there are many business opportunities available for those who would like to break in on a smaller scale. In fact, the directory section of Business Opportunities Handbook is filled with them.

Companies that got their initial financing from an outside source, such as a venture capital firm or a bank, have done better, statistically, than other companies surveyed by Trendsetter Barometer. Such companies typically were able to raise more start-up capital and later produced revenues 30% to 75% greater than the average growth company surveyed.

There are two key steps entrepreneurs can take to increase their chances of getting outside funding. First, plan ahead. Second. involve the right people and understand your market.

It is important to spend the time necessary to prepare detailed business plans, both for operational and financial requirements, if you are serious about raising outside capital.

"Many businesses with marketable products or services fail because their initial capital is insufficient to support operations through their formative periods," says Knight.

"The question you need to answer in seeking seed capital is: 'How much capital do I need to fund my operations until my market presence is great enough to be supported by internally generated funds?' versus 'How much capital do I need to get my product or service to market?"'

Knight advises erring on the side of caution if it comes down to that, even if it means giving up a bigger equity stake in the business than you would prefer. "In the long run, a smaller portion of a success story will be worth far more than a bigger ownership of a failed business," he points out.

Entrepreneurs looking to sell their concept to investors or lenders should focus on two factors, says Cynthia Feldmann, chairperson of Coopers & Lybrand's life sciences group. Those factors are "people credibility" and a detailed market analysis.

"When looking for financing, you must demonstrate that people with respect in a marketplace and with an industry track record have bought into your company's concept,'' says Feidmann. "This may be shown by their agreement to serve as advisors in the capacity of Board, or to be employed by the company."

She adds that investors and lenders also have to believe that a start-up company understands its markets, and that when its product is technologically feasible, there is a very profitable group of customers who will be interested in buying it.

In the survival stage, some companies give up additional equity to investors, while others assume additional debt.

"For some companies, giving up equity is not necessarily an option," says Bill Schroeder, an Entrepreneurial Advisory Services partner with the Detroit office of Coopers & Lybrand.

"If a company or an owner cannot provide adequate collateral, finding a willing traditional source of funding, such as a bank, is simply not possible," he says. "The risk inherent in the transaction is so great that the interest required is beyond what banks generally choose to offer."

An alternative for start-up companies that don't qualify for conventional bank loans might be a commercial credit company. However, they generally charge interest rates three to five percentage points higher than the prime rate.

What's more, they, too, require substantial collateral and personal guarantees. "They usually deal in asset-based transactions, which generally are not the kind of funding a survival-stage company needs," says Schroeder.

EQUITY FUNDING

An equity-for-funding swap is often a better choice. One possible alternative to the high price exacted by outside equity investors at this early stage is the company's own employees.

"This stage is often an opportune time to offer employees a chance to invest in the company," says Knight. "An employee has a better understanding of the company's potential and feels that he or she has some input in achieving that success. The notion that their investment will help protect their current employment is also a motivator."

Factoring may be an option for companies in certain types of industries. A factor buys a company's accounts receivable at a discount to the face value. The advantage to the business owner is immediate cash in hand. Factoring can be more expensive than other types of financing, but in some cases it can provide needed bridge funding at a crucial juncture in the survival stage.

The Trendsetter Barometer found that companies with banks as their primary financing source during the survival stage fared well. As a group, they raised median funding of $210,000, slightly less than the overall norm. However, those companies went on to produce revenues 17% higher than their growth company peers.

Companies in which outside investors, such as venture capitalists, were involved as the primary funding source at the survival stage raised almost five times the growth-company norm. Those companies went on to out-produce their peers by 30% in current revenues.

Banks and equity investors view survival-stage companies from different perspectives, and the information they require reflects their concerns.

"Banks are going to look at collateral, either personal or company assets," says Schroeder. Obtaining working capital loans on a term basis can be very difficult. Generally, these loans are based on eligible accounts receivable, usually 60% to 85% of receivables 60 days old or less."

Equity investments, on the other hand, are not collateralized. "The ultimate objective of equity investors, particularly venture capitalists, is to recover their investment and a tremendous return through the sale of company shares," explains Schroeder.

"Because of this, they require much more in-depth information about the history of the company, its products, people and plans for the future," he says.

During the survival stage, 48% of companies surveyed in Trendsetter Barometer received funding from banks; 17% from family, friends and their own resources; 16% from investors; 10% from profits and working capital; and 9% from alliances of customers or suppliers.

The average growth company in Trendsetter Barometers passed from the start-up stage through the survival stage and into the initial growth stage in only 28 months. As Coopers & Lybrand points out, that is what makes them trendsetters. First-time entrepreneurs need not be concerned if their own rate of development is somewhat more subdued.

INITIAL GROWTH STAGE

In the initial market growth stage, the new business has the market presence, product lines and distribution channels broad enough to meet the requirements of its largest customers. At the same time, it may face great capital demands.

The funding needs of the trendsetters in the survey doubled in the months between the survival and initial growth stage. The good news is that their average revenues also increased tremendously. Profits and working capital provided the primary funding for one out of three firms surveyed.

Still, 66% of fast-growth companies reported that at the initial market growth stage they were funded primarily by outside sources, including bank loans, investors and alliances. However, funding from owner resources at this stage totaled less than 1%, a significant drop from 17% at the survival stage and 73% at start-up.

This is the stage when many growth companies begin looking to alternative sources of financing, including insurance companies, finance companies and international and money center commercial banks, notes Bush. He advises that companies carefully consider the pros and cons of a private placement -- i.e., seeking investors privately rather than in the public market.

"A private placement specialist can tailor a new capital structure, identify and access the appropriate capital sources," says Knight. In many cases, a competitive process can be established that can enable a company to dictate many of the terms and conditions of the new financial relationship, he adds.

Companies considering raising capital by going public should concentrate on preparing for that move. The Trendsetter Barometer found that many growth companies planning to go public over the next three to five years are not taking the vital preliminary steps required to do so.