By Mercy Meuni
9 Realistic Ways to Fund Your Small Business
Whether you are seeking startup capital for your venture, finances to grow your business, or you need money to get your business through tough times, funding a business is an undeniably daunting task. A CBInsights report on why small businesses fail indicates that 29% of small businesses fail due to a shortage of capital. Fortunately, there is a variety of financing solutions available to budding entrepreneurs.
As a business owner, you need to keep in mind that there are no perfect means of financing your business. Every approach has its upsides and downsides, and a technique that was effective for another company might not work for you. It is crucial for an entrepreneur to carefully analyze the pros and cons of a financing plan before deciding on an approach. This decision will be influenced by; the amount required, your desire for control, interest rates, borrowing requirements, and capability to service the debt.
Some of the viable sources of income that you can tap into to ensure that your business thrives include;
Personal savings are possibly the easiest and safest option for financing your small business. Aspiring entrepreneurs can tap into reserves that they have set aside in the past and utilize them in launching their venture. Self-financing can also take other forms, such as using funds from your retirement account or borrowing by leveraging your investments.
A significant perk associated with self-financing is that you are not answerable to others should your business fail. By using your savings, you are also able to ensure that you are the sole owner of your business. Down the line, investors will feel more comfortable injecting money into your business when you have personal money committed to your company. If you do not deem your business a worthy, feasible investment, a stranger will most certainly hesitate to risk their funds.
Despite the convenience resulting from self-financing, there are some drawbacks to this mode of funding. The amount of money you can raise for your business is limited by how much you can save. Additionally, if your business fails, you’ll lose all your hard-earned savings. Self-financing is particularly suited to ventures with low capital requirements. If you have substantial savings, a smart move would be to invest some money and save the rest for hard times.
2. Friends and Family
Many business owners who lack enough savings turn to friends and family to acquire business funding. This type of financial backing can be either a business loan or an equity purchase. To preserve your relationships and avoid future disagreements, it helps to involve a lawyer and have your agreement in writing.
When you turn friends and family into creditors, you are not only risking their financial position but also taking a chance on meaningful relationships. As such, you need to approach this issue professionally. It is useful to draw up a sound business plan with precise financial projections to demonstrate that you value your creditor’s money. It is also vital that you stress the risks associated with your business to your loved ones. Once your company has gained momentum, make it a priority to pay back loans to avoid evitable friction.
3. Angel Investors
An angel investor can be a wealthy individual or a small team of executives who fund your small business. And, in turn, they own a part of your business. While launching your business, it is easier to convince a friend or family member to become an angel investor for your business. As an entrepreneur, you will need to keep in mind that they are part-owners of the company. You, therefore, need to make decisions that benefit both the business and its shareholders.
Attracting an angel to fund your small business can be a challenging task. It is, therefore, useful to approach this process with a precise strategy. Some of the measures that you can employ to win over your first investor include;
- Network every chance you get.
You can never meet too many people as a business owner. You need to attend every business event and conference as you might meet your next investor at these functions.
- Know your industry inside and out.
However good your business idea is, it is helpful to research extensively on your industry. Educate yourself on which business moves have led to success or failure in the past.
- Familiarize yourself with every aspect of your business plan.
You have to master all the components of your business plan. Referring to a piece of paper while answering questions about your business will give the impression that you are not well-versed with your project.
- Give realistic projections to potential angels.
In an effort to dazzle prospective investors, a business owner may be tempted to overstate the business potential. Savvy angel investors will, however, be wise to such deceptions.
- Choose the right investor.
More often than not, there are some strings attached to angel money. Don’t be too quick to accept money from an angel before clearly understanding the terms and conditions. An ideal investor believes in you and, as such, will give you room to run your business.
4. Bank Credit Cards
Credit cards can be a viable source of business funding for entrepreneurs. They provide an easy source of finances and can be especially useful in carrying you through the occasional jam and extending your working capital.
Business owners will either use personal or business credit cards to fund their business. Business credit cards are a safer option for an entrepreneur but are harder to acquire since a startup lacks credit. Using a personal credit card for your business comes with considerable risk as you could end up in a lot of personal debt if your venture flops.
You should tread cautiously if you choose to utilize credit cards to fund your small business. Most credit card companies charge exorbitant interest rates that can leave you wallowing in debt for years to come. Falling behind on payments will also hurt your credit score.
Crowdfunding entails acquiring a loan, contribution, investment, or pre-order from numerous people, simultaneously. A business owner puts up an elaborate proposal on a crowdfunding platform. This proposal outlines the amount of capital required and how the money will be spent. Investors and consumers then read about your business, and anyone can commit cash if they believe in your idea.
One of the most significant upsides to crowdfunding is its ability to spark interest in a product and thus further market the commodity. When a company conducts a fruitful crowdfunding campaign, venture capitalists are also likely to be drawn in and may further finance the business.
Crowdfunding is undoubtedly an appealing source of funds for a business. This feature, however, makes it highly competitive. For your company to succeed at crowdfunding, your proposal needs to be airtight. To come up with a remarkable proposal, you can research and learn from companies that have had flourishing campaigns.
An example of a crowdfunding success story is Oculus, a company dealing in VR headsets. The company’s founder, Palmer Luckey, launched Oculus Rift as a side project. In 2012, he started a crowdfunding campaign on the platform Kickstarter, intending to raise $250,000. The campaign surpassed its target and raised a total of $2.4 million. Facebook acquired the company in 2014 for a total of $2 billion. The success of the Kickstarter campaign stems from the fact that Palmer’s invention held long term opportunities and was technologically advanced. Enormous companies, such as Google, Sony, and Samsung, were also trying to create such technology. Pebble, SkyBell, and Bragi are examples of other companies that held wildly successful crowdfunding campaigns.
Kickstarter is one of the most popular crowdfunding platforms at the moment. Other forums include; Indiegogo, Fundable, GoFundMe, RocketHub, DreamFunded, Onevest, and Fundly. But make sure that when you’re looking for the right way to fund your small business, you do the research.
6. Venture Capitalists
Venture capital constitutes professionally overseen finances that are invested in businesses with huge profit potential. And venture capitalists may consist of a circle of affluent individuals or even financial institutions.
Typically, VCs prefer to invest in companies that are past the startup phase. Their investment acts as a purchase of equity in your business. In most cases, VCs are also interested in having more of a say in the direction of the company and may offer their expertise and mentorship. It is essential to carefully review a VCs offer before signing to ensure that the terms are acceptable.
Obtaining Venture capital can be a challenging task, but many small businesses have done it effectively. VCs come across lots of proposals, and for your business to stand a chance, your company needs to be exceptional. As the business owner, you will have to draw up a very detailed and sound business plan. To meet venture capitalists, you will need to utilize your business contacts and their networks. Fellow entrepreneurs and even investors can be instrumental in introducing you to VCs.
One of the benefits of having a Venture Capitalist fund your business is their willingness to invest tremendous amounts of money into your business. Such finances can go a long way in the expansion of your business and subsequently generating greater profits. Banks are also more likely to extend credit to your business since venture capital acts as equity.
7. Bank loans
Traditional financing products, such as bank loans, are still the first option considered by most entrepreneurs looking to raise capital for their venture. An entrepreneur can either acquire a working capital loan to fund your small business from banks.
To qualify for a bank loan, you’ll need to meet some conditions. Lending institutions are more willing to lend money to individuals with a good credit history or assets that they can put up as collateral. Most banks will also want to see a feasible business plan that showcases profit projections. Other documents that may be required include tax returns, bank statements, and balance sheets.
In the US, the Small Business Administration (SBA) offers loans to entrepreneurs who are having a difficult time qualifying for bank loans. SBA loans have fewer backup requirements and have favorable rates and terms.
Business owners find bank loans appealing because they allow them to maintain full equity of their companies, and it is possible to qualify for a substantial sum. Borrowing and repaying from banks also helps in building one’s credit. The drawback to utilizing bank loans is that, if you are unable to pay back the loan and interest accrued, you may end up bankrupt.
Entrepreneurs running small-scale ventures can raise funds by borrowing from micro-lenders. Microloans are also a practical option for individuals who cannot obtain bank loans due to poor credit history. Most micro-lenders tend to be non-profit organizations whose principal aim is to provide affordable working capital to those at the lower end of the financial pyramid. In addition to loans, most micro-lenders will further support aspiring entrepreneurs by extending free business mentorship and training.
To qualify for a microloan, you may need to create a business plan, avail financial statements, and put up collateral or a personal guarantee. Once you’ve obtained the funds, you are expected to pay back the loan and interest over a given time frame. Microloans are especially attractive due to their low-interest rates and fewer requirements to qualify for credit. A significant drawback to borrowing from micro-lenders, however, is that they only offer limited amounts of money.
Some of the leading microlenders include; Small Business Administration (SBA) Microloans, Accion USA, Opportunity Fund, LiftFund, Kiva, and Grameen America.
9. Retain your day job
Although not a favorite amongst most budding entrepreneurs, keeping your day job can be a viable means of funding your startup. If your 9-5 covers your bills and can afford you a relatively comfortable lifestyle, you should consider keeping it while getting your business off the ground. A startup may not be profitable in the early phases, and your regular job can offer security and carry you through the tough times.
When you retain your day job, you can grow your business with fewer concessions since you are not under undue financial pressure. A day job can also provide experience that can be invaluable in running your venture. The biggest downside to keeping your position is that you may miss precious opportunities while juggling your 9-5 and your startup. It is also harder to dedicate adequate time and energy to growing your business.
Some notable entrepreneurs who successfully launched their companies while working at a day job include; Phil Knight – a co-founder at Nike, Sara Blakely – the founder of Spanx, and Jack Dorsey – a co-founder and the CEO of Twitter.
There is a variety of lending options available to a budding entrepreneur. If one alternative does not work for you, you have to try another till you find an ideal way to fund your small business. Sometimes a combination of various financing options might be the answer for your business.
With a plethora of funding solutions available to business owners, it is crucial to borrow responsibly. It’s helpful to determine how much cash infusion your business actually requires and plan on how you’ll spend the money. A responsible entrepreneur will also have a repayment plan in mind. Remember that if you only borrow moderately, you’ll end up owning a greater percentage of your business.
And if you need help setting up your business once you get your funding sorted, contact Booming Businesses. We can set you up with a marketing strategy that will help you earn money and repay your loans quicker.