Financing Your Small Business Startup
So you’ve decided to start your own business. Having an idea and a vision is great, but now you need some money to help make it happen.
Starting a business from scratch is rarely an inexpensive activity, and in most cases it will cost considerably more than you planned for.
There are numerous ways to finance your small business startup, and in this article we will take a look at the pros and cons of the different options available to budding entrepreneurs.
If you can afford it, one of the best options for funding your company is to use you own savings.
Of course not everyone has sufficient cash to start a business, let alone cover their living expenses during the startup period, but at least you can stay out of debt, which is one of the biggest killers of small businesses.
Bank or Finance Company
Obtaining finance for a new business is not as easy as simply asking. Most banks will want a very detailed business plan along with projections, and many will also want to take security over your family home.
The downside to financing your business through a bank is that you are required to pay interest each month on your loan, and if things don’t go to plan there is a real risk that you could lose your home.
There are many stories of entrepreneurs starting businesses by maxing out their credit cards. This avoids the need to obtain a business loan approval from the bank, but if the business doesn’t work out you could end up with a lot of high interest debt.
Family & Friends
It is often said that new businesses are funded by family, friends and fools. If you are lucky you may have a family member who can lend you money with no interest payable, or you may have a friend who is willing to invest some money in return for a share in the company.
Obtaining finance from friends and family is generally easier than going to the bank, and often you will be able to obtain the money at a lower interest rate or in return for a share in your new venture.
Disputes about money do have a tendency to ruin friendships and family relationships, so if you are planning on borrowing money or taking investment funds from a friend of family you need to work hard to ensure that everyone stays on the same page.
Angel Investors & Venture Capital
An alternative source of funding that has increased in popularity over the last decade or so is that of angel investors and venture capital funds.
Angel investors are typically wealthy individuals who have already experienced success in business, and are now looking to invest into helping other new businesses to grow.
Venture capital firms are somewhat similar, however they generally don’t get involved until the business has become a little more established.
When taking investment capital from an angel investor or venture capital firm you will have to give them a percentage of your company in return for their investment. In most cases they will be looking to exit your company for a profit within a relatively short number of years.
If you’re starting a business that does not require large amounts of capital, you may be able to bootstrap your company.
Bootstrapping essentially involves running your business on the minimum amount of money required, and using your revenue to run and grow the business rather than needing outside capital.
You’ll still need some capital upfront to get started in most cases, and you’ll also need to be confident in your company’s ability to generate revenue very quickly in order to meet your expenses.
Staying Out Of Trouble
Starting a business is a very exciting thing to do, but you also need to be realistic in your goals for the business. It is important to have an exit plan, so that if things don’t work out you are not left with a debt that you cannot afford.