You have this great idea for your start-up small business and you have done your research. You have determined that there is a market for your product or service. Your business plan is in place, and now you are looking for funding. You must make sure that you have enough capital to purchase everything you need to begin offering your product or service; including a physical location, a website, office supplies, and even advertising.
Very few small businesses begin with loads of cash to spare. In fact, many mega-companies today began in humble beginnings like garages and backyard sheds. This is usually because funding for start-up businesses are difficult to come by. Moreover, traditional lenders have become more stringent in the requirements for funding start-up companies. Consequently, small businesses must obtain funding from many different sources over time.
And, if you are a start-up business looking for your initial seed capital, or a small business needing financing to grow, you have to be flexible, remain positive, and stay vigilant in your efforts. Keep in mind, it is often how you go about getting that money that can make a huge difference in whether your business ultimately succeeds or fails. Here are some possible avenues you can pursue in search of funding for your small business.
Most small business owners these days have come to the realization that they will have to self-fund their projects for a significant amount of time until more formal funding opportunities become available. You should have no problem investing your personal assets if you believe in your business and refuse to give up. Also, potential investors will be more apt to finance a project that you are willing to fund yourself. Here are some ideas for self-funding:
1. Take advantage of “zero interest” credit cards. Many cards will allow you this option for up to 1 year. Be sure to make minimum monthly payments on these cards. If you don’t make the minimum monthly payments you could be hit with huge interest rates, and the entire balance could come due.
2. Cash in your personal savings account. This is your money so you will not have to pay it back. But, be careful to leave a reserve in your savings account in case you or your family has an emergency.
3. Liquidate your 401K. However, since this money is employer-subsidized, and also tax-free, early withdrawals will carry steep taxes which can be 35% or more. And, since these funds are suposed to be used as a retirement fund, you will have age related penalties if you are younger than 59 and a half years old.
4. Access equity on your life insurance. Most life insurance policies, except term life policies, accrue equity. Consequently, some insurance companies will offer loans against your life insurance policy without reducing the value of the policy.
5. Take out a mortgage on the equity in your home. A home equity loan could provide the financing you need to start your small business. Your home becomes the collateral needed to secure the loan. Keep in mind however, if your business venture fails, you could lose your home.
6. Apply for a traditional bank loan. Lately it’s becoming increasingly more difficult to get a bank loan. However, even though lending standards are much stricter than before, many banks still have extra funds set aside for small business lending. And, quite often, they have a lower APR (annual percentage rate). This means that you will have to pay back less money than some of the other loan-based options.
Keep in mind that you will need a good credit score; generally 700 or higher. You will probably need collateral. And you will also need lots of patience since traditional business loans can easily take up to six months to obtain.
Funding from friends and family is a very popular and effective way to obtain initial capital for your business. Those closest to you are more likely to believe in your vision, and your ability to make that vision work. Be aware however, that you are risking personal relationships if your business fails.
Present your loved one with a formal business plan before you start asking for money. Also, know the amount you need and where and how you intend to spend it. Borrow only what you need to launch the business into operation, and to build your website. Certainly, all parties should get sound legal advice when preparing the loan documents.
In crowdfunding, you post your idea online along with a deadline and a financial goal. The general public can then pledge their money to help you meet these goals. Some people may choose to donate to your cause because they believe in your product or service. Others may respond to incentives, such as free products, and other perks. Here are some crowdfunding sites you should check out:
1. Kickstarter – Kickstarter is an enormous global community built around creativity and creative projects. If you have a project that could enhance the lives of others, Kickstarter may be able to help you. Your projects must be honest and clearly presented. Projects can’t mislead people or misrepresent facts, and the creators should be candid about what they plan to accomplish.
2. GoFundMe – GoFundMe allows you to request financial support for many types of business needs. And indeed, just about any type of financial need can be posted on GoFundMe pages. Some popular GoFundMe companies include Fundrazr, Crowdrise, and Tilt.com.
3. Indiegogo – The nice thing about Indiegogo is that this platform was created specifically for entrepreneurs. With Indiegogo, the public has the opportunity to support entrepreneurs, and new technology, from the earliest stages of development.
4. RocketHub is an online crowdfunding platform launched in 2010. Based in New York City, its users include musicians, entrepreneurs, scientists, game developers, philanthropists, filmmakers, photographers, theatre producers/directors, writers, and fashion designers.
You may post fundraising campaigns to Rockethub to raise funds and awareness for your projects and endeavors. Operating in over 190 different countries, RocketHub was once considered one of America’s largest crowdfunding platforms.
5. Fundable – This crowdfunding platform was also designed with the small business owner in mind. In Fundable, the goal is to remove some of the critical obstacles that typical founders face when fundraising. Fundable charges a flat fee. And, all proceeds from a fundraise end up where it is likely needed the most; with the founders.
An angel investor is someone who provides financial backing for entrepreneurs and small startup businesses. They can also give business-related guidance and offer connections to their own valuable resources and contacts.
When presenting your business plan, you should be succinct so that your potential investor is completely clear on your wants, needs, and goals. When raising money from angels you should know that they will own a piece of the business. Consequently, you have a responsibility to act in the best interests of the business, and its shareholders.
Attracting angel investors is a tricky business, and the devil is in the details. Know your business plan, be transparent, back up your valuation with real projections and build a relationship based on trust. If you’re not sure how to locate an angel investor to help finance your new small business, one option is AngelList. This website makes it easier for angels to invest their money in new startups like yours, giving you both the opportunity to build your company.
The U.S. Small Business Administration (SBA) offers new small businesses a variety of loan-based financing options, though there are a few qualifications to consider. Lenders and loan programs have unique eligibility requirements. In general, eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates.
Normally, businesses must meet size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding. When applying for an SBA loan, it’s critical to provide all of the requested information and documentation, making it easier for them to say yes. To help with this, the SBA has created a Loan Application Checklist.
Some of the included items are as follows:
Your Profit and Loss (P&L) Statement.
Your original business certification or license (if applicable).
Your personal resume.
A business overview and history.
As you can see, there are options for an entrepreneur to get the funds necessary to begin doing business. However, only you, as the owner can determine which option is best for you. You may even be able to tap into several resources to get to the financial goal you have set. There are pros and cons with each financing opportunity, so do not hesitate to weight the benefits against the difficulties. Take the time to research each option carefully and make an educated decision. Congratulations on your business venture, may you thrive in and attain your goal.