There are many different ways to secure finance for your start-up or small business. Some are riskier than others, and some are harder to obtain than others. Here are a few options to help you find the method that best suits you and your small business:
To find out if you’re eligible for a traditional bank loan, go to your bank to ask about their lending options for small businesses, and fill out a loan application form. Make sure that you fully understand the interest rates involved so that they don’t surprise you later. Your personal credit rating comes into play in the application process.
The main drawback here is that inexperienced entrepreneurs are less likely to be granted a bank loan.
This popular modern method of securing finance can work well if you have an accessible, well-packaged product or service. Kickstarter, Indiegogo, and other crowdfunding platforms allow you to pitch your business online. You can set goals for how much money you want to raise over a number of days and start a campaign on the platform to raise funds.
The internet provides you with access to an unlimited number of people who can contribute smaller amounts. You can also offer small rewards for people who pledge and watch those smaller amounts add up. Your success in crowdfunding does depend on your ability to appeal to the general public. Also, be sure to read all the conditions, as some platforms keep a percentage of what you raise, take shares, or have transaction and processing costs.
When an investor invests money in your company in exchange for shares, it’s called an equity investment. It is important to think about the percentage of shares you’re willing to sell to an investor, as this will determine what percentage of the company that investor owns. “Once you sell 51 percent of your shares, you lose control of your company” (smallbusinessbc.ca).
Your savings account
If you have a substantial personal savings account, you can be one of your own equity investors. This is a great kind of equity investment, as you can maintain significant ownership of the shares. Self-financing also reflects your own commitment to your business. So, the sooner you start saving, the better. Putting some money aside every month, even if it’s a small amount, can be a huge help.
However, using your rainy day money can be risky, because you might need it for an emergency. Consider using only a portion of it or keeping two separate savings accounts, in case your business doesn’t succeed.
Angel investors invest in young, growing companies and “expect to get a 20 to 25 percent return on their initial investment” (Business.com). Before you pitch to an angel investor, make sure that you have a solid business strategy and that you know your market well. This shows that you’re committed.
Venture capitalists expect to recover their investment within five years. As such, they are more approachable to small, but established businesses that can prove their success in terms of revenue coming in. Venture capitalists can also provide industry and market advice.
Preselling is when you sell your product before launching your business. According to Business.com: “The product has to be fully developed” so as not to negatively affect your company’s brand. This is a good option to consider if your product or service is ready for market.
5. Family and friends
There’s always the option of asking your friends or family members to contribute to your start-up. This can be convenient, but could also lead to ruined relationships if things go sour.
Do your research and know your business strategy so that you can lay out detailed plans. Do not just pitch a vague idea and don’t pressurise anyone. Be professional, clear, and honest about what you want: “Are you offering equity? Or will this be a loan?” (Inc.com) If you value the relationship, you will accept their answer and maintain honest communication.
You could use your assets to finance your small business. This could include selling your car or getting a home equity loan and using that money to fund your start-up. A home equity loan has the benefit of lower interest rates. However, if you don’t repay your debt you will lose your home, which can make this a risky option.
7. Credit card
Using a credit card to cover start-up costs is both easy and accessible. But interest rates can soar and leave you drowning in debt while ruining your credit rating. This option might be better reserved for emergencies. It can be very risky, so be careful if you choose this option, and always be responsible about how you use a credit card.
For small businesses with huge potential in science, social impact, or cutting edge research, grants may be the way forward. Grants often have specific requirements in terms of industry, so it’s best to find out what those requirements are beforehand. Government and NPO grants are the most common. It’s worthwhile to find out if your business is eligible for a grant, and it’s important to read all stipulated conditions.
If you have a small business idea, consider reading 8 Myths about Entrepreneurship to inspire you to further develop your entrepreneurial venture.