Starting a small business can be a tough task. There will be plenty of big decisions you have to make right from the start. Arguably the most important task you have is deciding on how you’ll fund your business. Secure the right funding, and you have the ability to lay down some solid foundations. Money makes the world go round, and it’s highly important that small businesses start off on the right track. So, what are the different ways someone can fund their company? I’ve got some ideas listed below:
Use Your Own Cash
The easiest way to fund your business is by using your money. Perhaps you have some savings in an account, or have some investments you can cash in on? By using your funds, you can enjoy certain benefits that the other methods don’t give. Firstly, everything will be a lot quicker for you. There’s no need to get anyone else involved; you can do things at your own pace. Secondly, it means you don’t start your business off in debt. Many of the other options require you to get funds from other people. As such, you may have to pay them back, so you fall into debt. Do things on your own, and you haven’t got that financial burden hanging over your head. Similarly, you’ll be the sole owner of your company. You own all the shares, as no one else invested in it. That means all the money you make will go directly to you. And, speaking of investors, they’re more likely to be interested in a company funded by an individual. It shows you’re committed to the business, and they like that. This means you could see large investments down the line to help expand your startup.
Credit & Business Loans
The second option is to fund your business with a loan. There are banks and lenders that may be happy to give you a loan for your small business. However, don’t think that you can waltz into a bank and walk out with a loan in seconds, despite what some of the advertisements might say. You’ll need a solid business plan that convinces banks you’re going to be able to pay the money back, with interest. If everything stacks up – your plan, forecasting, credit rating, they’ll offer you a loan. The obvious benefit of this is that you don’t have to use your funds. This means you have some personal savings to fall back on if things go wrong. Plus, you may be able to get more funding from a loan than from your pocket. Of course, you must be aware that your business may be used as collateral for the loan. If things go bad for you, and you can’t keep up with repayments, they’ll take it from you. The bank will own your business, and you’ll have to regroup and start again. Good business and financial planning can help you succeed. Loans aren’t the only line of credit you might consider – credit cards are often a more easily available option, albeit (usually) with a lower amount of available credit. If you don’t have a credit history then starting with a credit card may be a good first step before you go for a loan in the medium term.
Arguably the best way to get funding is from an angel investor. Business help sometimes seems like it’s everywhere – venture capital is a huge business, but that doesn’t mean it’s “easy” to find an angel. This funding works by the angel offering you a cash sum to fund your business. In return, they’ll ask for a share of the company. Typically, the more money you ask for, the bigger share they want. Funding from an angel is beneficial in various ways. For one, you don’t need to spend your money. Secondly, you aren’t going to be in debt to anyone. Thirdly, you can secure lots of money, way more than a loan or personal funds. Of course, investors will want shares in the company. It can take a while for you to find an investor and raise a round of funding. Again, make sure you have a stellar business plan and a high-quality pitch to convince them. And, by giving them shares, you’re handing over a percentage of your business. Some people are okay with this; others prefer to be in greater control. With a proper plan, you can use funding to ensure your business succeeds, you
succeed personally and the investors are happy. Which leads us onto…
Crowdfunding & Equity Crowdinvesting
Crowdfunding takes a few different forms. To some extent launching a successful Kickstarter project takes care of marketing and sales in addition to generating cash for product development or investment in growth initiatives. Other crowdfunding platforms, for example, seedrs.com or crowdcube.com, allow you to give away equity in exchange for investment. It’s the same principle as traditional investing, but without the need to try and personally build up a network of contacts that can put you in touch with venture capitalists. Crowdinvesting platforms are a recent development, and an interesting option for funding that, to some extent, lets you call the shots by spreading the equity over a larger number of investors (as opposed to securing the full investment from a handful of investors or a VC firm).
There are tons of different grants out there for small business owners. They can be difficult to find, but are well worth it. A grant will give you some financial backing to fund your business and turn your idea into something great. Business grants are great because you’re getting money and don’t have to pay it back. However, the application process can be long and tedious. For some small business owners, they’re too hard to find and take too long to get approved. But, if you have the time and patience, they’re an excellent option to help with funding. Startups have various needs, but funding is a common one. Figure out which option is best for you, and start getting money to help turn your ideas into profitable business ventures.
The Best Thing You Can Do
Whatever option for funding you choose, the best thing you can do is have a plan, and follow it. Take care of the “business side” of things – planning products, sales, customer service, marketing – and build your financial modelling around that. Cashflow is king for the new startup, and without a good plan for the first few months, many businesses fail.
Mark is a director at UK-based chartered accountants Horner Downey & Co., established forty years providing sound advice and value for money services to a wide range of clients.