Funding Your Small Business
Starting a small business is a thrilling prospect for any potential entrepreneur as it allows you experience financial independence and career flexibility. However, beyond the careful planning and creative thinking that goes into developing a business model, you are likely to face the challenge of finding the right funding source to help bring your ideas to life.
Luckily, you do not need to be a financial expert to find the right funding option for your startup. However, you must be able to identify and decide the best funding sources for your small business as this will impact your ability to achieve success. Here we explore all of the best funding sources that not only help you weather any potential downturns and can possibly improve your chances of reaching your goals and objectives.
Personal Investment
Investing in your own project is an ideal starting point for any proactive entrepreneur. This serves as proof to most lenders or investors that you are committed to your business for the long-term and you are willing to take risks. Putting your bankroll together may seem like an arduous task, but you can achieve a lot with a willingness to make tough decisions. For instance, you may consider cutting back on some extra expenses, getting a part-time job, or working overtime at your workplace. Be honest with yourself so you can set your priorities right. Making some sacrifice can be hugely beneficial for your business down the road.
Family and Friends
Family and friends could make perfect lenders since they may not only believe in your ideas but will likely be willing to support you make that idea and vision a reality. More so, interest rates from this funding source is usually very fair to the business owner. However, by integrating business and financial matters into your relationship with family and friends, you expose yourself to the risk of hurting such valuable bonds should the business fail.
In order to avoid the potential pitfalls associated with family/friends and business, it would be ideal to ensure a proper structure that benefits both parties, is set up. For instance, you could borrow just enough money to launch your startup and even seek sound legal advice, even if it means offsetting some legal fees. That way, you will be avoiding some drawbacks that could hurt your valued relationships and your business.
Find a Partner
Partnership is one of the most common funding sources for startups. It is especially beneficial for would-be entrepreneurs as they can gain more than just startup capital from the relationship. While some entrepreneurs may prefer their partner/investor to assume a passive role in the business, others involve partners in critical decision-making processes of the business.
In any case, if you are considering a partnership, you must be careful about choosing your bed-fellows. More importantly, you must ensure these partners share the same strategic visions down the road. With their first-hand experience, industry knowledge, and dedication to the progress of your company, partners can be a boon to an entrepreneur without enough startup funds. Keep in mind too, that every agreement with your partner must be spelled out in black and white to avoid any complications in future.
Take a Loan
In some cases, applying for a loan from your local bank may be your best startup funding option. While taking out a loan can be risky especially when there is a lack of capital base to begin with, it is important that you understand all the terms within your contract, particularly those concerning interest rates, payment deadlines, and any other requirements. It is also very important that you do not obtain more than you need for your startup, as such bungles can damage your young business.
Venture Capital
Venture capital is a great funding source for startups. However, it is not necessarily a good fit for all entrepreneurs since venture capitalists are often more interested in working with technology-driven businesses with huge growth potential in communications, information technology, and biotechnology sectors. Venture capitalists assume an equity position in the business to help it manage high risk, but promising projects. This means that the startup owner gives up some ownership in the business to an external party – the venture capitalist.
As investors, venture capitalists also expect a good return which is often generated when the company starts selling shares to the public. Due to the nature of venture capital and investment, it would be ideal to look out for investors who have a wealth of experience relevant to your business.
Angel Investors
Angel investors, also known as seed investors, are affluent individuals who invest directly in startups and small businesses. They are usually industry leaders who not only contribute their experience and network of influential contacts but also their management knowledge and technical expertise. That being said, much of the work of attracting angel investors to a small business largely has to do with meeting with and leveraging the right contacts. In order to build trust especially at the initial stage of the business, it is important that you repay the investor the money with interest – and at the right time.
Crowdfunding
Crowdfunding is a relatively new concept which can serve as a good startup funding source especially if the business idea is within the customer space. Crowdfunding has been used as a funding source for literally everything from clothing lines to even Hollywood movies. If your target customers are willing to engage in your crowdfunding campaigns to develop your product, this will give you a great lead for your startup. For instance, Interaxon – a company that produces a brain-sensing headband called Muse – was able to raise up to $287,000 through Indiegogo, a crowdfunding platform.
Government Grants
Government agencies provide grants and subsidies that may serve as a great funding source for your business. However, obtaining grants are often tough since there is usually strong competition for business financing. In most cases, these government agencies require you to match the funds you receive and this amount vary greatly, depending on the granting agency.
To qualify for government grants, you are generally required to provide:
- A detailed description of your business
- The business plan and full costs
- The benefits of your startup project
- Relevant experience and background on influencers and key leaders
Your grant proposal will likely be assessed based on:
- Innovation
- Approach
- Need
- Significance
- Experience
Startup Programs
Also known as business incubators or accelerators, startup programs provide the platform for upcoming entrepreneurs with relevant resources, information, and access to funding opportunities that are specifically optimized for new businesses.
Incubators or accelerators usually invite startups to make use of their premises as well as their technical, logistic, and administrative resources. For instance, an incubator may allow a startup to use its laboratories in order to test and develop its products at minimal cost before full production kicks off. The incubation phase generally lasts up to two years, after which the business exits the incubator’s premises once the product is ready for public consumption. Startup programs are usually community-centric and industry-focused.
Join Contests and Promotional Programs
Many business influencers today encourage the entrepreneurial spirit by organizing contests or competitions to uncover new startups and the innovative ideas behind them. While these contests can be a great funding source with substantial amounts in cash prizes to be won, the increased level of exposure which applies to all participants and entries can also positively impact the future success of your business.
Closing Thoughts
Now that you have some savvy funding ideas for your startup, it is important that you consider the pros and cons of all options carefully before committing. You must also keep in mind that no matter the funding source you settle for, prudence is critical for the financial value you seek so you do not run into trouble down the road. Armed with thorough and practical funding solutions for your startup, the task to establish a financing source for your business will not be as intimidating as it seems.