Contributed article in our entrepreneurial series. Enjoy! – Kimberly
The number of people who are choosing to start their own businesses and work for themselves is growing and every year more and more entrepreneurs are choosing to leave their current employment and try something for themselves. Some will fail, but some will succeed and never giving up is an appropriate attitude to have in terms of looking forward to the future of your business.
One thing that all companies need, however, no matter how big or small, no matter how new or old, is financing. Although it’s possible to start a company with little to no money, if you really want to make a splash and be successful more quickly, you will want to have some form of capital behind you. If you’re currently hoping to start a business (or expand an existing one) and you’re wondering where you might be able to find the money to do so, there are a variety of different ways that you can raise the cash and become the business owner and leader that you want to be.
What you need to consider is whether you want to finance your business through debt or through equity. Both are viable and both give you different options. Here are some ideas to help you make a decision.
Your Savings
Probably the easiest way to finance a new business is to use your own money. It may not sound too appealing as it could take every cent you’ve saved up until now, but if you really want to make a go of things, then that money could be put to good use. If you have no current savings and you want to start a business then it’s time to start putting the money you need to one side. You’ll need to know your costs so that you have a goal to head towards, otherwise you might not be putting enough away (or you might hit your target and not realize).
Using your own savings can sometimes be a good way to start any business because it means you won’t be in debt from the beginning. The biggest problem with this idea, however, is that you are limited when it comes to the money you’ve managed to save. Once the money is gone, you may need more and may be unable to raise it. This will need to be considered before you start because running out of money part way through would mean you waste the money you’ve already put in. Using your own money should be very carefully considered, as you do have control, however, once that money is gone, it is gone, and this may not be the best idea to use all of your savings completely. If you decide to use your own money, perhaps set some aside for the future to allow for any eventuality.
A Credit Card
Credit cards can be a great solution to funding a business and extending your cash flow in the early days. They can be used to pay suppliers, for example, while you’re waiting for your first customers to pay you. Paying suppliers ahead of the limit given can mean you get preferential treatment in the future including discounts of faster delivery times.
A credit card is a short-term solution, of course, and should never be viewed as anything else. If you plan to use a card like this over a longer period of time you will end up paying a lot more money through interest than you would otherwise have done. Remember also that a credit card will be linked to your credit score, and if you miss payments or find yourself in difficulties then it can have a detrimental effect on your borrowing abilities in the future which can in turn cause issues for the company.
Borrow from Friends and Family
If your savings won’t quite cover what you need, then you might want to consider asking your friends and family for a loan or investment. If they want to invest then you would need to offer them part of the company’s equity in return; a loan would not have this condition but you may have to pay interest. Make sure that all the terms are set out in writing before anyone signs anything and having a lawyer check several factors is always a good idea just to ensure that everything makes sense and no one is going to be out of pocket.
Although this can be the ideal solution for many small business startups, you do have to be careful that your relationship isn’t going to suffer if the business fails and money is lost. Are you able to keep things strictly business? Are the people who are lending you the money able to do the same? If so, then this may well be the perfect avenue to go down. If you’re not sure, try other funding sources first.
Angel Investors
Angel investors are private individuals who spend their time investing in businesses they think have potential. As with any kind of investment, they will want to own a share of the company, but that isn’t necessarily a bad thing. You will gain a partner in your business who is able to offer advice on every aspect from who to hire and how to do it to marketing and much more. That can be invaluable, and since you will also be gaining funds at the same time, many business owners opt for this choice.
In order to get a good angel investor, you will need to come up with a sensible and practical business plan. The investor will want to see that the money they put into your business is going to give them a good return – that is their main concern and although they will usually be happy to help the business, what they really want to see are profits. They will also most likely want to see that you have an exit strategy in place so that if things were to go wrong, they would still be able to recoup their initial stake.
Loans
There are two options when it comes to borrowing in the form of loans for the start-up of your business. The first is a specialized business loan and the second is a personal loan. When it comes to a business loan, you will need to provide the bank or lender with the same information as you would an angel investor – you will need a good business plan and you will need to be able to explain what you are going to do with the money you have borrowed. This can be difficult, however, as banks are extremely wary when it comes to lending.
The alternative is to get a personal loan which is often easier. Traditional lending may not always be possible due to poor credit, but there are companies such as Bonsai Finance that can help if this is the case. Since there are so many potential options it is important to look at affordability. It may be that you intend for the business to pay you so that you can service the loan, so if this is the case you will need to be sure it is going to happen. That’s why a financial plan is so essential; it will give you a much clearer idea of what needs to be done.
Factoring
Factoring is another type of financing that might be suitable for small businesses although it is not used as a way to finance the start-up. Factoring is a way of ensuring that your cashflow is stable. When factoring your invoices, you will essentially be selling those invoices to a third party. It is up to the third party to then collect the money from your client and you will have received the money quickly. Of course, when selling something you won’t see the full market value, so you will either need to take this into account when fixing your prices (and make everything a little more expensive to cover your factoring costs) or just absorb the cost into the company and make less money. This is an important decision to make and one that should be done right at the start when you are factoring; putting your prices up isn’t something that you should do lightly if you are trying to establish yourself.
Crowdfunding
Crowdfunding is a relatively new innovation but it has meant that many business owners have been able to finance their new ventures easily and successfully. It can be fun as well, because part of the process involves seeing your money growing as more investors and funders choose your company to give money to.
In order to start a crowdfunding campaign, you need to know how much you want to borrow and then you need to have a timeframe so that you can set everything up. You may also need to offer incentives to those who are considering putting money into your business. This might be shares or it could be goods or services – it will depend on which crowdfunding platform you want to use and what kind of business you are operating.
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