Entrepreneurs often have big ideas but small budgets when they first start a business. It takes quite a bit of cash to get most companies off the ground, and that can feel hard to come by when you're just getting started. Fortunately, there may be a lot more funding options for small businesses than you think. Several traditional and established paths to business financing and a few outside-the-box ideas can prove quite effective.
Some business owners get their start by bootstrapping — a term used to describe pulling yourself up by your figurative bootstraps and financing the venture yourself. This may involve taking cash from your savings account, 401(k), or other financial reserves and putting them into the business.
For some entrepreneurs, this may not be an option. If it is for you, think carefully before making a move. Hopefully, your new business venture will prove a wild success, but businesses can and do fail. Although it's not pleasant to think about failing, it's a good idea to make sure you don't spend more than you can afford to lose on your new venture, just in case. You don't want to clean out your retirement money and then have something go wrong.
Friends and Family
This is a tricky one. You may have friends and family members who are financially able to invest in your new business and help you finance it. These people already know you and trust you, making it much easier to persuade them to give you a loan. Working with someone you love or admire to turn a dream into reality can be quite a bonding experience when it goes well, too. But it can make Thanksgiving dinner pretty awkward if it doesn't.
When borrowing from a friend or family member, speak to an attorney and draft a contract. Clearly outline the expectations of both parties, including the loan payback terms. If you borrow from a friend, take any steps you can to ensure you'll still be friends when the business deal is done, even if things don't go well.
Get a Business Loan
Admittedly, this may be easier said than done. Traditional banks frequently issue business loans, and many go to startups and small businesses. You'll need to prepare thoroughly before approaching the bank, however. The loan officer will want to see your business plan, expense sheets, and financial projections for the next 5 years. Your presentation will need to be polished and backed up by documented facts. Be prepared for some personal scrutiny as well. A new business does not yet have a credit score or credit history, so the bank will likely investigate yours.
If you don't qualify for a traditional loan, ask the bank if they can consider you for an SBA (Small Business Administration) loan. Although the federal government administers SBA loans, local banks typically handle the application process. These loans are a bit easier to get than many others.
Angel Investors and Venture Capitalists
Angel investors and venture capitalists are essentially the same things. Both are investors who offer small businesses large sums of money in return for an ownership stake in the company. Angels are typically individuals, while venture capitalists pool their money into a mutual fund. The fund then invests in businesses.
Both usually invest in industries they're familiar with and, as such, can be a great source of advice and guidance in addition to funding. However, like the bank, they will want to see a comprehensive business plan and some evidence that you're not biting off more business than you can chew.
Although they can become great mentors, some angels and venture capitalists become troublesome if they take a hands-on approach with their investments. Depending on their significant ownership stake, they can become meddlesome, and you could lose some control over your business enterprise.
It's essential to stay healthy while running a business, and worrying about or arguing with investors can cause unhealthy stress. Know how much control you're willing to give up before getting in business with a venture capitalist.
Consider crowdfunding if you want to raise money without giving anyone else an ownership stake. Crowdfunding works best when you have a unique new product that you believe will be very popular with consumers, and it's one of the safest funding options for small businesses. This is a relatively recent phenomenon, so here's an overview of how it works.
You begin by posting your business idea on a crowdfunding internet platform like Kickstarter, GoFundMe, or Indiegogo. Here you explain what your product is and why people should want it. If interested, potential customers send money to you. You give those who donate to your cause various gifts in return for specific dollar amounts. A $50 donation, for instance, may earn someone a free t-shirt.
If the crowd gives you enough money to reach your goal, you must deliver any merchandise or gifts as promised. If not, the whole crowdfund goes away. You don't get any money, but you also don't have to give anything to anyone. Crowdfunding is a low-risk way to generate cash without giving up any company ownership.
There are many government agencies, nonprofit organizations, and corporations that offer small business grants. These grants all have different qualification criteria that you must meet, but they all have a critical thing in common: grants need not be paid back like a loan is. Grants are essentially free money.
The money may be free, but you'll still have to work for it. Everybody wants free money, so you'll be facing a lot of competition when applying for a small business grant. You will have to devote a substantial amount of time finding grants you qualify for and applying for them. Remember the relentless searches for scholarships when you went to college? Getting a business grant is very much the same.
Business Plan Competitions
To encourage entrepreneurship, various organizations sometimes host business plan competitions. Competitions allow you to submit your business plan for review and comparison to other programs using different sets of criteria. The best submission is then offered reward money to start the business.
You’ll need a perfectly polished business plan for this. You'll also want to practice your sales pitch, prepare to defend your plan, and answer some tough questions about it. Some competitions will require you to perform these tasks in addition to simply submitting your business plan. Bring proof and supporting documents for your facts and figures with you to any interviews or meetings related to the competition.
Unfortunately, not all businesses are environmentally friendly. Organizations want to change that, though, and many are willing to pay to do so. These agencies are known as green banks. Suppose your business focuses on environmentally friendly products, for example, or you want to run your operation on geothermal energy. In that case, you may qualify for a loan at a green bank, even if you don't qualify for a traditional loan.
Some businesses need expensive equipment before they can open their doors. For example, if you're opening a restaurant, you'll need a fully equipped kitchen to work your culinary magic, and that doesn't come cheap. In this case, consider securing equipment financing.
Equipment financing is easier to get than a traditional loan because the equipment itself serves as collateral. This means you won't have to stress about less than perfect credit. Equipment financing is specific and won't cover all of your startup costs, of course, but it can help you get started with less cash than you would otherwise need.
If, for example, you need $50,000 to start your restaurant, but $30,00 of that is equipment costs, securing equipment financing means you need only come up with another $20,000 to get started. $20,000 cash is easier to find than $50,000.
Business incubators don't provide any funding, but they do provide access to many services you need. A good incubator provides access to affordable workspace, small business experts and educators, investors, accountants, lawyers, and others who can help you start your business. Incubators do charge fees, but those fees are significantly less than what you would pay to hire lawyers, accountants, and trainers on your own. It helps to think of an incubator as training wheels on a bicycle. You ride on your own, but you have help if you need it.
If you've only managed to raise minimal startup capital, an incubator can get you up and running cheaply. However, incubators all have different rules, so make sure you understand your end of the bargain. Sometimes attendance at business training is mandatory. Other incubators require you to stay for a specified period.
Many fledgling businesses turn to invoice factoring to keep money coming in. Sometimes called invoice financing, factoring is a way to borrow money from yourself. To do so, you'll have to find an invoice factoring company and sign up with them. Then, whenever you issue an invoice to a customer, you will send a copy to the factoring service. The factoring service will then give you the money for the invoice (less a small fee). That way, you have your money now instead of waiting 30, 60, or even 90 days.
When your customer does pay your invoice, you will then send the payment to the factoring company to reimburse them. This process works very much like getting a prompt refund on your income taxes, so you may already be somewhat familiar with the concept. Invoice factoring won't generate extra capital, but it can create an immediate cash flow when tight money.
Merchant Cash Advance
Merchant cash advances are similar to invoice factoring arrangements. If you accept credit cards, you may ask your merchant service provider for an advance. If they agree, they'll give you money now. In return, the credit card company will take a percentage of every credit card transaction you accept and put it towards paying off your advance.
This process will get you cash now, but use it only as a last resort. The fees and interest rates associated with a merchant cash advance are usually relatively high. This is an effective but expensive way to get money.
As you can see, there are many funding options for your start-up. Once you've secured your funding, reach out to us for help. We focus on helping entrepreneurs succeed with services from reputation management software to website developers for small businesses. We can help ensure that your future customers know who you are when you make your business debut.