Accounting & Finance
When and How to Fund A Start Up Business
Money might not be the be-all and end-all when it comes to reasons to start a business, but there’s no denying that the business needs it to survive. You’re going to need money to cope with overheads like office supplies, equipment, access to utilities like internet and more. If you want the business to grow, you’re going to need money for marketing, too. But how do you fund your business? What’s the best way to do it and when should you look for funding?
Do you definitely need funding?
It’s a valid question to consider whether you need any extra cash to begin with. If you are looking to work as a freelancer, a self-employed person who offers specific skills to other companies or individuals, you might not need much funding at all. You might be able to cover the costs of doing business entirely if all you need is access to the net. However, if you need to get new equipment, if you need to hire employees, and you need to start marketing to get the business growing, then you should definitely consider funding. Some accidental entrepreneurs luck into a business by creating a product or service that meets a need so well, they rocket into business without any funding necessary. There’s a good chance you’re not that accidental entrepreneur, so be willing to look into other funding sources.
When to fund
One of the decisions that a lot of entrepreneurs wrestle with the most is when they should look for funding. Should the funding come before the business starts rolling or should you focus on building a business that can start earning before you look for additional funding? There’s more than one school of thought on the matter. Thanks to the internet and the rise of home business, it is easier to get a start in business without any major sources of funding. You should definitely have money of your own ready to invest in the business. Whether you build it by saving, by working a day job, or even by downsizing your home, if you want to attract funding at any point, you have to show you’re willing to back yourself. Otherwise, why would anyone else?
Raising your own cash
It may be possible that you could raise the cash for your business entirely by yourself. You can ask family, friends, and contacts to be early investors, for instance. You can set a budget for your finances that puts aside a specific percentage of your current earnings to build that initial business fund. You can even make use of your personal assets, whether it’s using your savings account or leveraging assets on a personal loan. Some will even use zero-interest credit cards as their initial source of funding. However, in using your own cash alone, you are taking on all the financial risk personally.
The seed fund
Seed fundraising is the term used when getting investors right at the beginning of the business. In many cases, this seed funding will come from individual investors, known as angel investors. Banks aren’t often willing to make loans to businesses that don’t exist yet. If you want to get investors in on the ground level, you’re going to need the right idea and the right pitch for it. This isn’t just about innovation, it’s also about having a plan to show how you’re going to grow the business and manage a good ROI. You need to have an understanding of the markets, the costs, and more. Otherwise, you’re not likely to convince anyone.
Angel investors and venture capitalists come with their own rewards, but they also have their own risks. In some cases, an experienced entrepreneur may be willing to act as a mentor, and they may give you access to some of their own connections, though that shouldn’t be expected. On the other hand, they usually won’t give a loan with just an expectation of repayment. More often, they will want a cut of the business. This could mean that a percentage of all profits in the future will go to them, even after they have earned considerably more from the venture than they first put in.
Angel investors can be approached for a loan at any point in the business, but if you’re going for a business loan from the banks, you are going to need to have been in business for some time already. Bank loans are accessible, especially to those who have been reliable customers for years. What’s more, unlike angel investors and venture capitalists, they don’t get a share of your profits after the business is up and running. You need to pay them back, including the interest rate set on the loan, but they won’t have a cut of your profits for the business’s lifetime.
Bank loans do come with plenty of downsides, however. For one, the process of applying for one can be incredibly cumbersome. An investor could agree to lend you money and you could have it in your account by the next day, but bank loans can take weeks and even months to process. They often have very specific standards that your business has to meet before they will agree to any loan. What’s more, banks have been known to approve a loan, but not the full amount involved. Instead, you might only get 60-80% of the funding you need. This means that you will have to look other fundraising methods instead. We have more information on the advantages and disadvantages of business bank loans in an early blog post.
What to take to investors
Whether you approach the banks, family and friends, angel investors, or even crowdfunding platforms, you have to be ready. Most funding sources won’t consider a business unless it came demonstrate what their business model is, who it works for, and how it works in practice. The best way to show that is to have some experience in the industry already, as well as a business plan. If it’s a specific product you want to get into the market, have some examples of how it has fared at trade shows or in other demonstrations. If your business has already been running, then have the facts and figures that support its profitability, and show how you intend to use the funding you’re applying for in order to grow further.
The truth is that there are a lot of ways to fund your business, but you’re likely not going to get much of that funding unless you can prove you’re investing in the business yourself and that the business is worth investing in. Having a marketable idea and a plan is much more likely to get you funding no matter who you try to get it from.