They say that the journey of a thousand steps starts with just one. And never does a journey feel longer than when you’re trying to get your business off the ground. All you have is a big idea, a lot of goodwill and the hope to create something that will be a hit with the wider world. But pretty soon, you’re going to need an injection of capital to help finance your entrepreneurial vision. This is the first roadblock that many small business owners hit.
Where is the money coming from to help turn your idea into a reality? Even the smallest of start-ups will have significant upfront operational costs that need financing, and that’s before you get into requirements like a modest marketing budget to help you expand. Assuming you’re not independently wealthy, where can this money come from? Here’s all you need to know to finance a new business:
Tap Up Your Contacts
You may not have access to a network of wealthy investors just yet, but you do have your family and friends, and these contacts can be a surprisingly good source of start-up capital. You’d be surprised how many businesses have gotten started on the back of personal connections. The key is to be extremely business-like in your approach. Just because you know these people personally, don’t use it as an excuse not to treat them like proper investors. Pitch your full business plan to them, make it clear what they can expect and when and put in place a clear repayment plan that’s honoured with a formal contract agreement. Many will be excited about your new venture and want to help out, but they must know what to expect from their contribution. Even if each person can only afford a small amount, spreading the net wide can help you to achieve what’s needed.
Access to Personal Savings
If you are lucky enough to have savings, consider borrowing what you need from there. However, if this is your strategy you should approach with caution. Sinking everything into a start-up can leave you extremely vulnerable at what is already an unpredictable time, so make sure you’re only investing a proportion of what you have. It’s a good idea to have at least six months’ worth of living expenses saved that you don’t touch – that way if things start to go wrong, you have a bit of a cushion before you hit rock-bottom and this will buy you time to put things right. Remember, you may have to go a while without paying yourself a salary while the business is getting off the ground.
Venture Capital Funds
Among the more official routes, there is the option of getting investment from a venture capital fund, but most are notoriously risk-averse, so unless you have a watertight business plan, a strong track record and some heavyweight interest, it can be tricky to secure. You’ll need to have an extremely convincing pitch and be prepared for some very detailed questioning. There are venture capital funds that specialize in ‘seed’ funding or smaller amounts for very new businesses, so it may be best to approach these. Be prepared for the third degree- they’re interested in what you’re like as much as the business itself. You’ll essentially be selling a stake in the business for equity or partial ownership, so be prepared to make compromises.
Depending on where you live, government economic development programmes to help new businesses startup can be quite extensive and a lucrative form of securing investment. A lot are set up to support under-represented groups of people, so you may, for example, find more things to apply for if you’re a woman, part of a minority group or living in an economically disadvantaged town. A lot of these programs look at the growth potential of the business. They want to know that an investment will create jobs, so stress a need to employ people if your business gets off the ground. Depending on your age, there are also likely to be programs of support focusing on young people or older entrepreneurs too.
A lot of big businesses are now branching out into financing or other forms of support for micro-business. Credit giants like American Express and Michelin have all begun running programs that provide business support, plus some come with in-built benefits like mentoring, training and helping to set up a business plan. Competition to get a place on these schemes can be fierce, but they’re a really good option, especially if you feel you need a bit more hand-holding from an investor.
Home Equity Loans
If you’re fortunate enough to be a homeowner, you have an asset right there that can potentially be monetized in the pursuit of your new venture. You may first want to check your credit score, and if it’s not above 700, take steps to improve it before making this move. You’ll also need to have significant equity in the property to be able to do this. The amount is taken against your property as a lump sum that you can pay back over a fixed term. Use a home loan simple calculator to work out what you might be able to borrow. Because it’s a secured loan, interest rates are relatively low, so it’s not a bad method of borrowing, but do make sure you have emergency funds as you don’t want to be faced with losing your house if the business goes bad.
Pack the Plastic
Using a credit card to bankroll things may seem like the easy option – after all, it’s right there in your pocket – but before you do this, make sure there aren’t other avenues open to you, as this form of unsecured borrowing is high-risk. Try to ensure you pick a card with a low rate or an interest-free period if you’re confident you will be able to repay the outlay within the interest-free term. Shop around for the lowest rates and the best terms, so you don’t end up crippling your fledgeling company with unsustainable debt.
Aptly named, ‘angels’ are wealthy individuals who choose to provide financial backing for early-stage businesses, again in exchange for a stake in the company. Lots of household names found a start using an angel, including Uber. These investors tend to specialize in a particular area, so do your homework and pitch to one with a track record in the industry. Bringing more than just cash to the party, angel investors often have valuable contacts and knowledge and a lot combine the role of mentor with investor – they have a vested interest in seeing the business succeed. Make the plea for business experience and contacts as much as for funding to let them know you’re a serious prospect. Their tolerance for risk is higher, but so will their expectations be for the company.
Ask The Crowd
Crowdfunding has really taken over in the last few years, and will see you make an open pitch online inviting the general public to become part of your project. If you have a popular idea that will appeal to a lot of people, its ideal but you must make investor rewards clear from the outset. Crowdfunding also gives you an idea of the appeal of your product or service and can provide great insight into how you should develop. People who have invested also become great sources of word of mouth marketing themselves. However, if you have a complex or hard to explain product that’s very specialist it may not come across well. There are many different platforms now, and each has a different type of market, so make sure you do your research. If your funding bid fails to reach a target amount it can also have negative consequences for your company’s reputation.
Whatever funding source you use to bring your company to market, it’s going to take hard work, determination and a few lucky breaks. Perseverance is your friend, so remember the roll call of small start-ups that are now globally recognized international brands, arm yourself with a solid business plan, and go for it.