Securing Funding For Your Startup
Now that you know what to do and what not to do when starting your business, it may be time to pull back a bit and stop thinking about the glitz and glamour that you dream of realizing when you start your own business.
Prepare and Do Your Homework
Before you can get your company out of the red and into the black, more likely than not you will need to secure some startup money. Fortunately, there are various sources of funding to start your business, each with pros and cons. Fundamentally, you should do background research on the various means of acquiring initial funding and what caveats come with each.
Depending on the size of your new business, what sector you’re in and what sort of business you expect to be doing, the amount of money you’ll need is also key. It’s incredibly important not to just ballpark a number here, taking a shot in the relative dark to come up with a hard figure. Instead, research.
To properly assess the needs of your individual business, you need to first understand your costs, according to the US Small Business Administration. After you’ve determined your expenses, assess your assets, allocate costs and then bear down and make the calculation. Entrepreneur’s starting cost calculator can be handy for this.
This is another point of capital acquisition that needs its fair share of research. Although the four means of funding your small business or startup listed below are surely not the only four, they are four of the most common. I urge that you weigh your options equally and choose the best option that fits the needs of your business.
One of the most common and easily understood means of funding a business, actually getting approval on a business loan might be harder than you think. The application process, however, is fairly straightforward. You’ll need to provide the bank with the purpose of the business and display the willingness and ability to repay the loan once your business has taken off.
You can typically expect to pay somewhere around 3-4 percent interest on the loan, meaning a $150,000 loan will wind up with over $5,000 in interest.
The Small Business Administration goes further into detail on what you’ll need to apply for a business loan here.
Venture capital is typically utilized once a business has already set the groundwork for a business and is looking to expand or expedite growth. Venture capitalists often invest their own money (think millions) into an emerging or fledgling business in exchange for partial ownership or expected returns on their investments. These large investments often come after the approval of a committee which can be a more arduous process than angel investing, as seen below.
Angel investors operate with the same intent as venture capitalists, but often on a smaller scale. Instead of finding a business on the edge of a breakthrough and investing a few million for expansion, angel investors are well-off individuals (or groups of individuals) who are likely to invest smaller sums (think tens of thousands) of money into a startup. Because of a higher risk factor in going into a business earlier on, angel investors often look for a quicker return on their investment than a VC.
Crowdfunding is an emerging means of securing startup money. Over the years, technology has allowed for techniques like crowdfunding to take off. Websites like IndieGoGo or KickStarter have been immensely successful in raising money for businesses that have gone on to thrive. The benefit of crowdfunding is the lack of interest on the money you receive, though investors will often expect something in return for their money, be it an early-access product, a t-shirt or even a shoutout on Twitter.
No one said starting a business is easy, that’s for sure. It involves trial and error, a good business plan, and, of course, strong investors. No matter how you plan to secure the funding for your small business, make sure to do your homework and plan wisely and you’ll be putting yourself on the path to success.