If you’re new to the business world or just getting ready to start your very first business, how you will fund it is a HUGE question that can be answered a few ways. Depending on your goals, expectations, and reality, financing too much money can be a big problem.
You’ve got to get creative and think out of the box for how you want to fund your small business. Small businesses have played a major role in the economy, especially when it comes to hiring, but hiring requires capital, and capital can be hard to come by.
When I started my first business I didn’t really consider all of the associated costs when it began to grow. I didn’t need a huge sum of money at the beginning because I was working in the homes of my clients. I didn’t need to think about renting a building, or payroll, or hiring more staff because it was just me, in my home, on my own time! However, I’m not like most! And most small businesses use several different sources of funding over a period of time. No single source of funding is necessarily easier to come by than another unless you have been saving since you were 8 years old and have $200k lying around somewhere (that would be super nice).
This is where your business plan comes in and how well you can sell yourself to potential financial partners. Here are four ideas for how to fund your small business:
1. Do it yourself
Most entrepreneurs and small business owners know that it’s realistic to self-fund (also known as "boot-strapping") their projects for a significant amount of time until they are able to secure more formal funding opportunities There are many ways to accomplish this from savings accounts, low-interest credit cards to leveraging personal assets. If you refuse to accept defeat as an option and truly believe in your vision, you should feel comfortable investing your own money into the business. In turn, this will make potential investors more comfortable knowing you have skin in the game. Just keep your eye on other opportunities!
2. Friends & Family
Asking friends and family to help fund your business is a very popular and effective way to round up some initial capital. Those closest to you are more likely than anyone to believe in you & your vision. Keep in mind that if you use this source, you are potentially risking personal relationships should the business take a huge loss, especially if your agreement was not structured properly. I recommend structuring this type of funding as a high-interest loan for one year. Borrow enough to launch the business into operations, build your website, etc. and seek sound legal advice. Not doing so could potentially cost you much more down the road.
3. Small business loans
Banks can be a good option due to having longer loan term which may be helpful for some businesses short on cash flow. Another reason to pursue debt financing is that you aren’t giving away a piece of your business. Ask fellow business owners and entrepreneurs where they bank and how their bank works with them. Not all banks are the same and some are better at understanding the needs of an up and coming business that needs capital. Try to find a bank that you can develop a close working relationship with so they know you, your business, and can help with your needs. Also, consider programs like the SBA has to offer. Programs like that can offer attractive financing options but might require a considerable amount of paperwork and legwork to get approved.
4. Angel investors
This path has a lot to do with timing and leveraging the right contacts. The benefit to an Angel investor is it carries less risk than debt financing since the loan won’t have to be paid if the business fails. The downside is you lose total control of your business as they become part owner. When raising money from angels or VC’s you have to keep in mind that they will own a piece of the business and you then have a fiduciary responsibility to act in the best interests of the business and its shareholders. Attracting angel investors is a tricky business. Know your business plan, be transparent, back up your valuation with real projections and build a relationship based on trust. Choose your investor carefully, as they will now have input into your business and you want to be able to work with them effectively. If possible choose an angel investor that can also bring more than money to the table, someone that can help your business with their experience or contacts.