If only it were as easy as searching between the cushions of the sofa or opening up your piggy bank…
Are you ready to launch your new business? If you’re lucky, your startup won’t cost much. But don’t count on it. Most small businesses require at least a little bit of capital to get up and going. If you need a store front or an office, you’ll have to pay to lease the space (and purchase furniture or retail shelving and cash registers, etc). You’ll may need to purchase inventory or hire employees or buy specialized equipment.
All of this takes money. Usually before your venture has any income.
So where can you find money to help fund your start-up? Here are a few ideas:
1. Personal Savings. This is the place to start. It’s the easiest money you’ll raise. And if your startup is successful, you’ll own 100% of your company. If you’re not willing to invest your own money into your business, how will you convince anyone else to do it?
Some prospective business owners shy away from putting their savings on the line, tapping their retirement accounts, taking out a second mortgage, or running up credit card debt to fund their venture—they think it’s risky. And they’re right. It is risky.
But if you’re averse to risk, you may want to rethink your desire to start a small business in the first place. That’s risky. Find an idea you believe in, one you’re willing to take a risk on to make succeed. It usually takes risk to get a reward.
2. Consulting or Freelance. Sometimes the best way to fund your startup is to get a job doing the same thing you’ll be doing at your startup. This works well for software engineers and others who can consult on the types of projects that they are building for their startup. This approach removes a lot of the risk of failure because you still have a job that helps pay the mortgage. But it also means that much of your focus is on your day job until you can make the transition to your business. And you have to sacrifice your personal time to build your business.
Let’s say you’re an accountant (or attorney or designer) working to start his own practice. Rather than quit and start from scratch, take on some clients after hours. As your after-hours consulting gig grows, you can transition out of your day-time job into your own business.
3. Friends and Family. Besides your own money, for most small business owners, this is the best and easiest source of funds. If your small business truly has a chance to succeed, but needs more money to get there, you might consider approaching your friends and family. Be careful, more than one family relationship or friendship has been damaged by business deals gone bad. It can make the next family reunion very awkward.
If you choose to take this route, show them what you’ve built, share your plans for using their money, and how their investment will help you reach your goals. Discuss whether their investment is a just a loan (paid back with interest) or whether they’ll receive an ownership stake (and a portion of any profits). Be gracious if they choose not to invest (these non-investors may provide you with some great feedback about what’s wrong with your idea). If they do choose to give you money, provide regular updates on how the business is going—both good and bad. And pay the loan (or dividends) as soon as you are able.
Note: don’t ask for money from people who can’t afford it. Risking your home or retirement on your business is one thing, risking your mom’s home is something else.
4. Banks. If you think getting money from your friends is difficult, wait until you ask your bank. Banks don’t stay in business by making loans to business owners who can’t pay them back. So if you want a loan from your bank, be prepared. You’ll likely need a written business plan including expense and revenue projections. You’ll want to provide letters of intent from prospective clients. You may need to have your business appraised. And you will almost certainly need to provide some kind of collateral (like your home) for the loan. In addition, your bank will likely require you to carry a life insurance policy large enough to pay back the loan in the event that you die.
Your best bet will be a small local bank or credit union. They have a vested interest in your community and are far more likely to invest in a small businesses than big corporate banks are. We found this to be true when we started our own business and bought Logomaker. The local office of our big corporate bank was interested in our business and projections, but the loan officers out of state didn’t care enough to return our calls. When we approached a local bank, they were very easy to work with and quickly approved the loan we needed to get started. Today that bank has all our business.
5. Angels and Venture Capitalists. For most small business owners, this is the last resort (though for some reason this method of fund raising gets the most attention). Angel and VC investors can provide a big infusion of cash, expert advice, and connections to help you grow. But it’s not all upside. You’ll give up a significant ownership stake in your company—as much as 40% the first time, and even more if you need another investment. You can lose control of your company if you’re not careful. Most importantly, professional investors will expect a big return on their investment, so if you don’t plan to sell your company or go public in the next 5-7 years, this isn’t a great way to raise money.
Before you approach Angels or VCs, you’ll need a great presentation outlining your business plan and how you’ll beat the competition. You’ll almost certainly need to show that you can attract customers today (and even more customers next month). And you’ll need a good product. Very few professional investors will invest in an idea alone. They’re looking for great companies that can grow quickly.
6. Crowd funding. This is a relatively new area for small businesses and startups to find funds to help them get up and running. In fact, its so new, that many of the rules are still being written. Websites like Kickstarter and Rockethub can help you raise money if you can provide incentives to potential investors. These can be things like t-shirts, early access to your product, or discounts. Investment crowd funding (sites like Crowdfunder) requires you to give up equity in exchange for receiving an investment, which can get complicated. Proceed with caution.
If you’ve got a good business idea, there are ways to raise the money you need to get it off the ground. Start with your own savings, then, reach out from there.
Image credit: robeo / 123RF Stock Photo
