It all starts with a great idea, an idea that has probably been on your mind for a long time. You’ve got the product figured out, how you’re going to deliver your service, where you’re going to set up your office, and how you’re going to market your new business. But the hurdle always seems to be the funding to get you started.
Finding the financing to start a small business is a major problem for any potential small business. Some startups lend themselves to very little startup capital because the main selling point is the skills and knowledge of the owner, eg consultants, web designers, public relations specialists. Companies that require inventory, plant and equipment, and other investments face the real challenge of getting start-up financing.
So what sources can you tap into to ensure your business gets off to a strong start?
your savings
The first port of call! If you’ve been in a job for a while before going it alone, hopefully you have some extra money behind you. Whether it’s in the form of cash in a savings account or stocks and mutual funds, this is a great start to your fundraising exercise.
You can focus more on saving cash if you’ve had a goal of setting up your own business for a while. Knowing that you need to save to get your business off the ground will ensure that you don’t spend your future savings on unnecessary items. While a new plasma TV or the latest DVD recorder may seem like an essential purchase, knowing you have a business to set up in the future will be enough of a deterrent to keep your checkbook tucked away.
keep your job
Some business owners are lucky that during the early days of the business they are able to keep the day job while working the business on nights and weekends. This has two benefits. First, they’re still earning, which gives them more time to build up a cash reserve. Second, it is an opportunity to test the business to make sure there is a market.
Make sure you can realistically keep both balls in the air at the same time; Otherwise, you will end up doing neither your job nor your new business justice. The support of your family is also essential to follow this strategy. They have to accept that what used to be ‘family time’ may have to take a backseat until you decide to focus on the business full time.
family and friends
These can be a useful source of funding for any start up. If you’ve harbored ambitions to run your business for some time, chances are many of your family and friends already know about your idea. Therefore, you must have an indication of who is for and who is against.
If you haven’t shared your secret wish, then it’s time to get a little devious! If you’re in the early planning stages, start dripping your ideas to the key people you think are likely to support you. Tell them your ideas, share your ambitions and goals, and update them regularly with your progress. The plan is to sell you and your future business at an early stage.
Once you get to the point where you’re ready to start soliciting contributions, host an Investor Night. Prepare a presentation that describes your plans, the business, the market, etc. Show potential investors what their return will be in recognition for supporting you.
Invite as many people as you can and promise an interesting and fun evening. Be bold from the start; tell them exactly why they are there, so there are no misunderstandings. After you’ve made your presentation, gather all the names of people who might want more information or even a personal interview with you.
While this group is made up of people who know you and are therefore more likely to trust you, don’t forget that you’re developing a very different relationship that can quickly turn sour. Get ready for tough times!
Line of credit or bank loan
Now you’re getting into serious stuff! Getting bank support for a new business is difficult, as many entrepreneurs will testify. One smart way is to apply for an unsecured loan while you still have a job. If you’ve planned things well, you’ll know when you’re starting, so a few months before your job ends, apply for a salary-based loan. Of course, make sure you can comfortably meet the fees. There is no grace period; You are expected to pay immediately, so your business will need to start turning a profit very quickly.
The alternative is a business line of credit. There is no fixed return date, although they will be for periods of 6 to 12 months, and you just have to make sure you stay within the overdraft limit. You will have to write a business plan to present to the Bank that describes your idea and the business.
Release of Mortgage or Equity
With the way home prices have been rising in recent years, the vast majority of people now have substantial equity in their homes. The cheapest alternative to an overdraft or bank loan is a mortgage. The interest rate is lower, and because the payments are spread out over a longer period, the monthly payment is lower (although you’ll end up paying more in interest in the long run).
The downside to raising cash this way is that your home is potentially at risk. If meeting monthly payments depends on what the business can generate, then a slow start could cause cash problems. So make sure you can meet the payments even during a lean period.
Credit cards
If you don’t have savings, can’t get the support of family or friends, or a bank loan or mortgage, then there are your credit cards! However, although it is easy to withdraw money from your card, be careful! Credit cards are the most expensive form of debt.
They’re ideal because all you have to do is pay the minimum amount, but card debt, as most people have discovered, can be a long-term burden. But, if you need a lump sum of cash to get the business up and running and you know you can pay it off in a few months, then it’s an alternative source of financing worth considering, albeit a bit unorthodox!
business grants
Business grants are available for specific industries, sectors, and reasons. Grant providers will usually only award a portion of your requirement, so they cannot be used to fully fund a start-up. However, they can be helpful in filling a funding gap.
business angels
A popular way to finance a business is Business Angels. These are people, usually retirees or successful entrepreneurs in their own right, looking for opportunities to invest in new businesses.
In exchange for an investment, they will typically seek an equity stake in the business and some hands-on involvement. They will have vast business experience and are therefore useful people to have on board. However, you will have to accept an element of loss of control, but that needs to be balanced against your desire for funding.
Getting financing for your new business can be challenging, but there are a number of avenues to explore, and so with dedication and focus, you could soon be on your way to launching your own small business.
