While starting a new company and being your own boss may be the American dream, finding capital to start the business can sometimes be the biggest road block. You’ve got the idea for the next best thing in the business world, and you’re sure it’s going to be a huge hit. But your financial forecast is looking quite gloomy when it comes to funding this dream of yours.
I have the vision of what this business could become, but where do I begin to make it a reality?
Before you start looking for ways to fund your new business, you need to know several things about your startup in order to ensure you are going in the right direction with raising capital for it. Several factors need to be considered and many questions answered early on. This is critical since it will ultimately form the blueprint to the financial foundation of your new business.
Ask Yourself These Questions First:
How much capital do I need?
It is critical to be realistic when deciding on a dollar figure to get your business going. You want to be sure you ask for enough money to really get things rolling, but not too much so that your request will be denied at every turn.
What is the value of my company?
When trying to figure out the potential value of your company, you need to once again be realistic. What is the company actually worth today? Does it have any assets currently? How much could it realistically be worth in the future? How long will it take to get to that point?
Who might benefit from this startup?
While this may seem like the greatest idea you have ever thought of, is it practical in the real world? Is it something that the public will find a need for or value in? What other businesses already exist that might benefit from your startup?
Who might be interested in investing into my company?
Once you figure out which existing businesses might benefit from your idea, you may have just identified who would potentially provide some initial startup help as well. You should also include anyone who believes in your idea (Yes, this may include mom and dad).
What are my legal responsibilities to potential investors?
Imagine starting your new venture and having it be off to a great start, only to lose everything because of legal problems. Know your legal responsibilities and requirements before you get started so that you do not run into any of these problems later down the line.
Now that you’ve got those important questions answered, you are well on your way to understanding which direction you might want to go in to seek funding for your project. There are many options for people who want to start up a business but lack the initial capital needed to get the project going.
Which method is the best for raising capital for my startup?
Every business is different, and every entrepreneur unique in their ideas and methods of doing things. For this reason, there may not be any one right answer to which way is best, but rather many ways that could work for various organizations. Here is a quick review of the most common options available with a look at how they differ and the pros and cons of each.
Family and Friends
This is often the best option for smaller start ups. Rather than asking for money directly, you could even ask for family or friends to help by donating hours to save you the costs of having to hire a new employee.
Pros: These people are often your biggest supporters, and probably the only ones who will get their hands dirty to help the cause in any way needed.
Cons: Many good relationships have gone bad because of money. Be careful when making any business deals with family and friends to always make sure everyone involved is protected.
Probably one of the most common ways to get the funding you need to start your business, small business loans from a bank can provide a substantial amount of money to get you started depending on your credit.
Pros: This is one of the most traditional ways to get your business started. There is relatively little risk as long as you are able to repay the loan, and you can usually receive larger amounts of initial funding. Many banks also offer low introductory interest rates to get you started.
Cons: You will usually not qualify for a bank loan unless you have a history of good to excellent credit. If you have less than stellar credit and do manage to qualify for a bank loan, the interest may be exceptionally high and not worth the overall value of the loan.
Government Funded Program
There are plenty of government funded programs to help people start up new businesses in certain industries or geographical areas. Oftentimes, this money can be awarded in the form of small business loans and grants. And if you’re lucky enough to get a grant, you can treat it as free money and don’t have to pay it back.
Pros: These government funded programs and grants are often not required to be repaid, and can also sometimes include tax rebates or credits.
Cons: Government funded programs are not available for every type of business startup and finding one that you qualify for may not be an easy task.
Many people overlook this option when trying to get their business started, but bootstrapping the budget for your business idea can oftentimes work.
Pros: There is generally no risk to attempting to bootstrap your business to a healthy start. Bootstrapping simply means that you use minimal startup funds usually from personal savings or other means of capital that you already own. This option allows you to get very creative but also makes you put in a lot of blood, sweat and tears. It does not cost you a lot to try bootstrapping your new business in the beginning.
Cons: Depending on the type of business you are trying to start up, this method may not be realistic if you require larger amounts of capital. Bootstrapping means you start on a shoestring budget, next to nothing, which may not be practical for all new business models.
One of the least desirable methods to find the funding you need to get your business started, credit cards may end up being the only option for some entrepreneurs.
Pros: Credit cards are usually one of the easiest methods to get quick cash to get your idea off the ground. Many credit card companies will also offer introductory rates and 0% interest periods on business credit cards, which can come in handy.
Cons: Over the long run, high interest rates and revolving credit allows you to continue the pattern of borrowing more and more. This will end up costing you a great deal of money. If you have plans to repay the startup money over a longer period of time, this option is most likely not for you.
Finding an lending source other than your local bank can sometimes be the most practical solution to finding the money you need to get started.
Pros: Some lending companies can offer decent amounts of money which may cover the majority of your startup costs, and often have competitive rates compared to some other options. Additionally, you may receive an extended period of time to be able to repay the loan.
Cons: Like credit cards, these loan options can often include higher interest rates and may not work well for you if you have poor credit.
Use Crowdfunding Websites
There are many organizations that exist online these days to help get projects started. Some of these include Kickstarter and Indiegogo, and can be a great way to campaign for the needed funding to get your business started.
Pros: These organizations can be a unique and creative way to get “sponsored” to build your dream company. They are generally easy to use and often require little effort on your part to set up.
Cons: These fundraising campaign websites can take a bit longer to raise the money you need to get started. If your startup is in an industry that is newly emerging or highly competitive, you may not have the time needed to make one of these fund raising sites work.
Find An Angel Investor
Angel investors can not only share their money to help you get started, they also can be great resources for helpful tips when it comes to turning an idea into a success.
Pros: Angel investors are often business men and women who were also once in your exact position. They enjoy the concept of giving back where opportunities present themselves, and can offer great advice for many business aspects. Not only that, they likely have a surplus of money to give away.
Cons: Usually when you find an angel investor, they are contributing to your project for a hefty fee – a percentage ownership in your company. This may not be a problem at all, especially if you share the same goals or the investor doesn’t influence your day-to-day. But if you are not careful, it may be dangerous to lose too much control over your company to someone that doesn’t quite have the share the same vision.
Find a Business Partner
Finding someone else who is equally excited about your idea and has the financial means to get the business started may be easier than you think.
Pros: Usually a business partner will be excited to see the new business startup succeed and will often do whatever necessary for the company once they are on board. Having their personal money invested in a concept often makes even the most reluctant business partners willing and able to help in other ways as well.
Cons: Unless you have the exact same ultimate vision and goals for how you feel the company should go forth into it’s beginnings, taking on a business partner can spell disaster. If you do not agree on day to day operations or bigger yet equally important items, your dream business may turn into a nightmare before you know it.
Weigh All Your Options
Usually when you find an angel investor, they are contributing to your project for a hefty fee – a percentage ownership in your company. This may not be a problem at all, especially if you share the same goals or the investor doesn’t influence your day-to-day. But if you are not careful, it may be dangerous to lose too much control over your company to someone that doesn’t quite have the share the same vision.
While turning your dream of owning your own business into a reality may be a simpler feat than you originally thought, there are many things you need to keep in mind especially in the company’s early beginning. One of the most critical items to remember when bringing any other party on board with you as an investor, is to make sure they have the same vision as you do for what the future of your company looks like. There’s nothing worse than losing your dreams to a simple difference of opinion.