Alright, so you decided to start a business but the problem is there’s just one big thing between you and your opening day, and that’s money.
How much do you need? Who do you ask? What places can you look for the financing you need to launch your dream business? These are questions I hear every day from my clients.
A lot of people think a great idea is enough to make the money come from them, but that’s just not true. You have to be strategic about it. There’s such a thing as the wrong source of funds. And just because you think your business is fundable, doesn’t mean it is. Lenders and investors have a lot of experience talking to new companies about their financing needs, and they know what all the red flags are.
If you and your business plan’s job to address those red flags, remove them, and persuade a source of money that you are the best person to receive it.
Looking for a breakdown of what types of funding are out there and what you can do to access them? Look no further. This article has what you need.
5 Ways to Finance your New Business
1. Business loans
Bank loans are one of the most common types of financing for brick-and-mortar startups and traditional businesses that only need a small amount of financing (say, under $500,000) to get from “idea” to “open”. Bank loans are good for brick-and-mortar businesses because stores shops and restaurants tend to purchase assets at startup. They will buy equipment, inventory and have leasehold improvements that can be depreciated over time. All of these things reduce the bank’s risks of lending the money. Technology startups and online businesses aren’t usually a good fit for a bank loan for the same reasons: they have very little collateral for the bank.
2. Love Money
Friends and family are the most common source of financing for new businesses. If your friends, mom, sister, or cousins are willing to put some of their hard-earned cash into your business idea and trust you to use their money effectively, you might just have a great little business on your hands. Friends and family are also usually the easiest people to ask for money, because you already have a relationship with them. If you do use Love money to finance your business, however, make sure you sign a written agreement with everybody who hands you cash – one that outlines the source and use of funds, says what happens if the business folds, and explains that no return on investment can be guaranteed. Don’t make any handshake agreements. If your business fails or your strategy goes sideways, You’ll be glad you did this.
3. Angel Investors
Why are they called Angel Investors? Because they’re hard to find and they perform money miracles. Angels take a huge risk when they invest in you. These are the types of investors that put money in before a company even has a prototype or has done any market testing or has even really proven that the product or service can be successful on the market. Angels are usually willing to take this risk in exchange for greater reward down the road. By getting in early when your company is worth nothing, if you are very successful, they will get to make a lot of money off of you. And that’s exactly what you want.
But don’t ever expect Angel Investors to give you money just because. You still want to approach them with a clear business plan, a clear strategy, and a clear rationale for why your idea is likely to succeed.
Note that I didn’t lump Venture Capitalists into this category, because they generally invest at a later stage of business. If you’re just starting out, venture capital is probably not a good fit for you.
There are now three types of crowdfunding: rewards-based, equity crowdfunding, and debt crowdfunding. The type of crowdfunding that’s best for your business depends a lot on what stage of business you’re in, how much money you’re looking to raise, and whether you sell products or services. Kickstarter campaigns are normally better for product-based companies, because they have physical goods they can send to the funder in exchange for their money.
If you’re interested in crowdfunding, you should be well-versed in online marketing, social media, and how to create a buzz online. If this is not your strength, be prepared to hire somebody to help you. A crowdfunding campaign is all about getting people to become raving fans of your brand and making them believe your business is the best place to put their money. that’s not easy to do when no one has ever heard of you.
5. Grants, Credits, and Subsidies
I’ve written before that there’s no free money for your business, and that’s largely still true today. Grants – funds you don’t have to repay – are incredibly rare, despite what a Google search might tell you. Since most small businesses still fail within the first 5 years, organizations that give money away in the form of grants all the time wouldn’t be very sustainable. When grants are available they are usually very small amounts of money – not nearly enough to fund the start of your business.
However, you should look into tax credits in your local area. For example, some cities offer tax credits to businesses that open up in specific areas that they wish to revitalize. Other municipalities offer tax credits in the form of discounts on property tax, or they offer other incentives to boost local economies. Do a Google search for business tax credits in your local area to see what might be available for you.
Subsidies are also a great source of money, and they are kind of like grants, but they normally require you to pay some money first and then apply to get it back. An example would be a wage subsidy, which would allow you to hire employees for your business and then get some of the money you paid them back from the government. While subsidies don’t technically qualify as start-up funding, if you can get one it can save you a lot of money in your first few months of operations.
Find Your Fit
Remember, “if you build it they will come” never works for small business. Finding financing is like marketing your business to your initial group of customers. These are the first people who will get behind your ideas, support you, and help you grow. Therefore it’s absolutely crucial that you carefully evaluate which types of financing are best for your business instead of blindly submitting your business plan to any potential funding source you can find.
Got questions about how to find financing for your small business? ask them in the comments section below. Let’s talk about money!