In this day and age there are less barriers than ever to starting your own business, but one of the strongest barriers which still exists is that of funding.
Any business will require at least a bit of seed capital to get started and the question of how to finance your business is one of the first you should consider before even beginning to write your business plan.
Ultimately the question of how to finance your business depends on your circumstances and what kind of business you’re starting.
There are quite a few different roads available, some can be simultaneously walked down whilst others may give you all the capital you require plus a bit extra. Let’s take a look at some of these avenues.
From the old saying ‘pull up your bootstraps’, bootstrapping means to finance your business yourself, without any outside help.
This options viability depends on your personal finances and the type of venture you’re starting. If you have a substantial amount saved and your business doesn’t call for a huge amount of start-up capital and initial running cost, it’s entirely possible to commence using just your own funds.
Bootstrapping is an effective financing method if you can afford it — you won’t owe anyone anything and you’ll answer only to yourself. It is important, however, to choose wisely and take into account possible worst case scenarios.
What happens if the business fails, can you afford to lose that much capital? How long can you afford to finance the business yourself without any sales coming in?
As the old saying goes, ‘don’t put all of your eggs in one basket’. If you’re going to bootstrap, be sure to use a sensible portion of your finances, not all of them, and always take into account living and personal costs.
2. Friends and Family
Seeking funds from friends and family is probably one of the first ports of call and can be an effective form of financing.
Friends and family know you personally, so they’re more likely to lend to you and far less likely to ask for interest on return, plus they’ll be more flexible on repayment timing. However, this method can be somewhat treacherous.
Often, family relations and good friends don’t make the best business connections. If the business doesn’t go so well, will you be able to pay them back? Are you willing to potentially sour a relationship for funding?
If you’re asked for a slice of your business in exchange, are you willing to let that person have a say in your business, or pay out the same percentage in equity?
3. Bank Loans
It’s only logical to seek a bank loan when looking for finance. There are government schemes which help provide bank loans to start-up enterprises, depending on which country you live in — a simple web search will provide the information needed.
Bank loans, of course, come with interest added onto the repayments. It’s worth shopping around for the best rates and perks, as some come with added extra’s like accounting software packages and web building tools.
You’ll need a clear business plan and an idea of where your revenue will come from before a bank will even consider you, and many will require assets to guarantee the loan.
4. Angel Investors
These are private individuals who have often succeeded in business themselves and are now looking to invest their own money. Think Dragons Den.
An angel investor will want a share of equity in return for their investment and will often offer business coaching and mentoring, in part to impart their wisdom, in part to speed up return on investment.
It’s difficult to come up with hard rules on this type of financing — each investor will have their own preference of industry and their own business coaching style.
If you’re able to find one who takes a shine to your idea or you as a person, then not only could you get funding, but you’ll also likely gain a valuable asset to the business.
5. Venture Capitalists
VC’s are in business to make large amounts of money in relatively short time frames, so they go for big projects (we’re talking millions). It’s unlikely they’ll be interested in early-days and pre-revenue start-ups.
If you’ve got big plans and a hugely scalable idea though, it’s worth trying to meet a few VC’s.
If you get one, their expertise, market contacts and sheer amount of cash could skyrocket your venture to dizzying heights — just make sure you have a viable exit strategy before you get into bed with a VC.
6. Government-based Funding
Some governments have their own avenues set up for helping a new venture find funding.
In the UK, for example, the government has a scheme called Tier 1 which seeks funding for new UK-based businesses from abroad, with the requirement that the business creates at least 2 full time jobs.
Governments also provide grants for a whole range of business ventures. Science, the arts and engineering are just some industries where grants are available.
It’s definitely worth searching online for what government funding and grants may be available to you, which will be ultimately dependent on the country you live in.
Application processes are usually quite long and you’ll have to jump through a few hoops, but securing government funding or a government grant can give your business serious credibility in the market place.
A quick web search will give you an idea of what could be available to you.
Perhaps the newest and most fashionable form of financing. Crowdfunding is where large amounts of people each give you small amounts of money which add up to (hopefully) large amounts of finance.
In return you’ll have to give them something, of course, depending on the amount a person gives. Small contributions could get them a mention on your site or your marketing, for larger pledges you could give out freebies, first chances to sample your product, or even shares and equity.
Crowdfunding success lies largely in how well you can connect to the general masses. If your business strikes a chord with people, for example something environmentally friendly or altruistic, or if you’re looking to provide real technological advancement for example, crowdfunding could do quite well for you.
The second important thing about reaching people through this method is delivery. People must be able to very obviously see your unique value proposition or be able to relate to you in some way.