Whether you are a successful serial entrepreneur or just thinking of starting your own business, one main question will arise – how will you cover your startup costs?
Traditionally you’d walk down to your local bank and try to negotiate a business loan based on your business plan, network or assets. That’s not as easy anymore these days.
So what options do you have to secure sufficient capital to support you and your business during the exciting yet intimidating startup phase?
This article will cover some conventional and unconventional ways of getting funding to launch your business.
How Much Funding Do You Need?
Before you figure out how you’ll secure the capital you need to sit down and figure out exactly how much you need. That figure is highly dependent on your business model, competition, execution plan, etc.
Once you have a business idea it’s advisable to do a thorough job writing a business plan including financial projects. Writing a proper business plan is a fantastic exercise to find answers to all of the questions raised above. The financial section of your business plan needs special attention. Carefully review all of your assumptions, projects, and expenses.
Once you are confident in these figures you can figure out what it will cost you to launch the business and what it will take to get you to breakeven and beyond. One of the many reasons why businesses fail is because they run out of runway before they generate sufficient revenue and/or profit to keep them afloat.
Your startup costs are the sum of expenses and capital injections to get your business up and running and maintain it until it’s self-sufficient.
I Know My Costs, Now What?
The amount of capital you require will determine how many funding channels are available to you. If it’s a small amount, angel investors, venture capitalists and commercial banks won’t get involved. If it’s a significant amount, odds of simply asking a family member for a loan probably won’t work either. A major benefit of drafting a carefully researched business and financial plan is that it will give you a great indication of likely success.
A business idea might make a lot of sense at first but if your research indicates you’d need tremendous capital injections with a projected break-even point seven years out it might be better to look at another opportunity. If you are still confident after crunching the numbers then it’s time to look at your available funding options.
What Are My Options for Funding A Startup?
It’s important you understand all of the available options to you. Going after the right funding source with the right project and pitch will increase your odds tremendously. It’s as easy to raise $1 Million for your biotech venture as it is securing $5,000 for a small business. It all comes down to aligned interests and objectives. Make sure you identify the right financing partners and hone your pitch accordingly.
Keep in mind sometimes the answer is you don’t need any funding at all if you are willing to bootstrap your business and branding.
The next section will highlight some of the most commonly used ways to fund a business. This is not an exhaustive list but a good starting point to get you going on your funding journey.
1) Getting a Personal Bank Loan
Getting a personal bank loan is still one of the most traditional ways of funding your business.
Although this isn’t as sexy as a big VC funding announcement it’s very suitable for many small businesses. There is a misconception that you walk into a bank and secure a loan based on your business plan. Gone are the days of getting a business loan based on your integrity and reputation in town.
Banks generally don’t fund ideas but they are willing to lend you money if you have a home or any other asset that you can personally use as collateral, or if you can show sufficient income from employment to support the loan repayments. There are a few other options for people with no established credit, however.
2) Using Credit Cards
Credit cards are one of the most utilized tools for funding small web-based businesses, brick and mortar stores, cafes, etc..
Most people have access to at least one credit card and if there’s available credit it’s tempting to use it. Similar to getting a personal bank loan you are taking on debt to start your business. It’s great to be passionate and believe in your business but you don’t want to bet the house on a single venture.
Use credit cards and debit cards wisely when considering your funding sources. Having said that when in a pinch, or when there are no other funding options available, credit cards get the trick done if the funding requirements are relatively low.
3) Friends and Family
For those who don’t want to access or can’t access bank loans and credit often turn to friends and family. Lots of successful businesses have been funded by family and friends in the form of a loan and sometimes even gifts. How you want to structure this deal comes down to your relationship and the financial situation of the person you are asking.
The odds of new business failure is high. Keep that in mind before asking friends and family. If your business were to fail and you wouldn’t be able to repay the loan how would that impact your relationship? If you are one of the lucky few with a rich and generous uncle who’s willing to gift you the funds then this isn’t much of a worry for you.
4) Find an Angel Investor
If you are looking for a larger mount and personal loans, credit cards and family and friends aren’t an option then an angel investor might be a good fit. Angel investors are typically wealthy individuals with a business background who are looking for better than market returns. They invest in the seed and early rounds and often are very hands-on. They don’t just provide capital but also guidance and access to their network.
Deals with angel investors are typically structured as equity deals so you aren’t taking on any debt. The trade-off with equity deals, of course, is that you are giving up a stake in your company. Depending on the deal an angel investor might even ask for control of the business.
5) Seed Accelerators or Incubators
In most major cities you can find angel investor networking events and groups where you can present your business.
More recently seed accelerators and incubators have become popular. Those invest during the same stages as angel investors but take an even more hands-on approach for an equity stake in the exchange.
Entrepreneurs often travel from far away if they get accepted into one of those competitive programs. Not only do you get access to capital and guidance but you’re surrounded by like-minded entrepreneurs.
6) Venture Capital
If your business goals are really ambitious and require a lot of capital, the venture capital route might be the best choice for you.
Venture capital funds inject millions into businesses often across several different funding rounds. It’s very competitive to secure a venture capital deal but it comes with lots of benefits. Not only will you gain access to their funds but their expertise and exhaustive network of key players across industries like software, biotechnology, security, manufacturing and more.
Going the venture capital round means you’ll likely give up the most equity out of all the funding sources covered here. To avoid getting diluted over time make sure you get a fair valuation, especially if you need multiple rounds.
7) Government Grants and Loans
Small businesses are the backbone of the economy. The government understands that and gets involved in several different ways from tax credits for small businesses to grants and loans. Unlike angel investors and venture capitalists, you won’t give up any equity. Taking some time to research and understand local government grants and loans that might be available to you is time well spent. There are a lot of wonderful resources available, especially for female and minority entrepreneurs.
Some of those programs might give you a tax credit on salaries spent on research and development or fund a portion of your next tradeshow booth or even a trip to try and close a deal with a big lead. Leveraging government loans and grants is advisable even if you already secured funding through one of the other channels.
A new way of funding your venture has been to leverage crowdfunding platforms. Crowdfunding works on the principle that a large group of individuals will each pledge a small amount to make up the total funds required. There are several popular crowdfunding sites and they bring together entrepreneurs and investors from all over the world. To get started you simply create your page and pitch your venture.
If your project is successfully funded you’ll end up paying a predetermined fee. This is a low risk and low effort. Visiting one or several crowdfunding sites is well worth your time. Who knows, if it goes viral you might secure your funds in no time at all.
9) When All Else Fails — Bootstrap
Despite all of the available options many entrepreneurs still find themselves in a position, for one reason or another, where they just have to bootstrap to make up for the lack of funding.
If that is the case then you just need to operate very lean and apply growth hacking, until you prove your business case. Sweat equity is a great substitute for capital in the early stages. It means you aren’t wasting any resources and focusing on what moves the needle. Once you prove your business case you can circle back and revisit different funding options. Financing partners will notice and appreciate your passion and commitment.
How to Ask for Money?
Now that we have covered some of the most popular ways to fund your startup let’s look at the key documentation you need in place to support your case. Asking for money when you’re not prepared won’t do you any favors.
1) Business Plan
Whether you are pitching VCs, going after government grants or asking friends and family make sure you have done your homework. Develop a rock-solid business plan and keep it updated as you learn more about your industry, competitors, and core demographic.
3) Market Research
A business idea needs to be validated by market research. Without market data, it’s just an idea based on assumptions. Do your market research and find out if there truly is a need for the product or service you are pitching. The more supporting data you can provide the stronger your case during a pitch meeting.
4) Financial Plans
At the end of the day, it comes down to financials. Will your business turn a profit? When will you reach the break-even point? These are all questions that need to be answered and supported by your financial projects and statements.
5) Pitch Deck
A pitch deck is simply a condensed and visually appealing version of your business plan. Putting together a pitch deck is easy when you have done your market research and developed your financial and business plan. Doing a pitch deck without supporting documents, on the other hand, isn’t and will typically fall apart during a Q&A session.
Financing is a crucial fuel for startups. The more capital you have access to the faster you can scale your business. Capital is a double-edged sword, however. If you have done your homework and not rushed any of the phases of discovering and building your business model then you’re in great shape.
If your business model isn’t rock-solid yet then capital will often do you more harm than good. You’ll simply burn through money faster without actually addressing the underlying issue. As important as financing is for the success and growth of your business make sure you have a solid foundation.
If you are ready to take on outside financing, whether in the form of debt, equity or grants, the sources highlighted above are a good starting point. Figure out which one of those are best suited for your situation and then go for it. Keep in mind securing funding is often a lengthy process so don’t get discouraged if it doesn’t happen for you right away.