How to raise money for your new business
- Hosted October 31, 2019
- By Admin
You’ve heard of legends who went from basement to boardroom. You may even have family or friends who started a business with nothing and are now running their own empire.
One thing these inspiring stories often gloss over is the challenges that come with raising capital. Although some businesses get started with very little money, and others seem to get investments easily, many businesses struggle to get the funds they need to grow. Lack of capital and poor cash flow are the primary reasons why small businesses fail, so if you’re a new entrepreneur one of the most important steps in building your business is funding it
In this guide, we cover all the ins and outs of fundraising in the early stages of your business. Fundraising in the later stages of your business is an entirely different (and very complex) topic, and one day it’ll make sense to dive into it. For now, though, let’s talk about the different strategies for getting your business past the idea stage.
Self-funding can be a great way to start your business. Think about it this way: you can spend your discretionary income in various ways. You can spend it on possessions; you can spend it on experiences that create memories; you can invest it in the market where you have little control over risk, or you can invest it in your own enterprise where you can mitigate risk with your own blood, sweat, and tears.
Many entrepreneurs start their business as a side hustle while continuing to work their normal jobs. If you do this, it’s a good idea to do your homework and avoid encroaching on any non-compete clauses, conflict-of-interest provisions, disclosure requirements, or other contractual obligations in your current job. If you’re clear of these potential roadblocks (talk to an attorney if you aren’t sure), your nine-to-five can support your six-to-ten.
As your business grows, at some point you’ll have to make the decision to quit your day job and commit to working full-time on your business. As the owner of a self-funded startup, you can prepare for this moment by saving money and starting to monitor both your personal and business expenses so you’ll know how much of a cushion you’ll need in order to take the leap.
The FFF round
Many entrepreneurs, after deciding it isn’t possible or practical to self-fund their startup, turn to friends and family members for seed money. This first tier of investors is commonly called FFF: Friends, Family, and Fools.
These investors are the people who are closest to you; people who will open their wallets because they believe in you or your idea. When they invest in your business, they’re investing more than just money, so it’s especially important to approach this round with professionalism and discipline. FFF investors are already biased in your favor, so you have to make sure they’re making an informed decision.
Some basic tips: clearly communicate risk, write a contract, and don’t accept investments that compromise their wellbeing or your relationship. Having a business fail is bad enough; you don’t want to lose your best friend’s retirement savings along the way.
Crowdfunding is a great way to get your business idea out in the open. It’s a way to get investments both from your inner circle (family, friends, acquaintances), and it can encourage them to share your business idea with their inner circles. Using a crowdfunding platform is a great way to gather investments from FFF investors because it adds objectivity and helps to ensure that risks have been clearly communicated.
If you’re considering crowdfunding, there are two key things to keep in mind:
- It’s a lot of work. There are many resources that will help you create a strong crowdfunding campaign (in fact, we have a guide to getting started here), and the gist of it is this: it’s not just about selling an idea; you also have to build a community, generate buzz, reach out to potential customers and investors, build an online presence, and do exhaustive research.
- You’ve got to spend money to make money. A successful crowdfunding campaign requires assets, such as a video, photos, and some basic branding. If you’re planning a crowdfunding campaign, make a budget and figure out where you’ll get these initial resources.
There are many types of loans with different rates, collateral requirements, qualifications, and other considerations. Here’s a quick list of types to consider.
As the name suggests, a term loan lets a business borrow a lump sum of money and pay it back (with interest) over a specific term. You can get term loans from banks or online lending services. An unsecured term loan is ideal for business owners who already have established credit. If collateral is required, the loan becomes a secured loan and credit requirements are generally less stringent.
The Small Business Administration has several loans designed specifically for small business owners. These loans provide payment terms based on what you’ll be using the loan for: equipment, real estate, etc. If you’re looking to refinance your existing business or have strong credit, this may be a good option; on the flip side, SBA loans can be hard to acquire and have lengthy application times.
If you’re having trouble acquiring a larger business loan due to lack of existing business credit history, you might look at obtaining a personal loan to fund your new business. The main downside to this option is that you’ll be personally liable for the loan. Personal loans are worth considering if you have strong personal credit that you’re willing to leverage (and risk) for your business.
You guessed it: microloans are small loans (often a few thousand dollars or less) that are typically distributed by non-profits or similar organizations. These loans are designed for smaller startups or businesses that are serving disadvantaged communities.
Equipment loans are for purchasing machinery or appliances. The equipment you purchase acts as collateral for the loan, and the terms and rates are tied to the expected lifespan and value of the equipment. Having an established business with strong credit or financial numbers can help lower interest rates.
Business lines of credit
Similar to a credit card, a business line of credit gives you access to a certain amount of money within your credit limit and you only pay interest on what you withdraw. This option is good for businesses looking for flexible credit to cover unexpected expenses.
Invoice factoring and financing
Invoice factoring involves selling unpaid invoices (debt) to a third-party collection agency, while invoice financing allows you to use your existing, unpaid invoices as collateral for a cash advance. If you have invoices that are due in the future, invoice financing is a good option to consider; if you have unpaid invoices that were due a while ago and haven’t been paid (despite reminding your clients), invoice factoring can allow you to recoup part of the lost funds.
othing is free in this world — except grants. Okay, even grants aren’t entirely free since they involve specific requirements and they can be a lot of work to obtain, but you won’t have to repay the grant or pay interest.
When you’re looking for grants, keep an eye out for grant-related scams where agencies ask you to pay money in return for obtaining a grant.
Government small-business grants
Government agencies are the biggest distributors of grants and are a great way to acquire funding for any type of business, particularly small businesses looking to expand.
- Databases: You can find a comprehensive list of available federal grants at Grants.gov and USA.gov. Both sites are massive databases that also offer helpful information about the application process and qualifications for each grant.
- Research Programs: If your business is built around creating new technology or making innovative discoveries, specific research grants and programs may be available. The Small Business Innovation Research and Small Business Technology Transfer programs, for example, are designed specifically to help small businesses involved in scientific research and technology development find federal grants and contracts.
Regional small-business grants
At the state and local level, numerous programs and agencies make it their mission to help small-businesses find grant opportunities and learn more about available financing options.
Your local Small Business Development Center seeks to support entrepreneurs and small businesses by connecting them with different financing and grant options, training opportunities, and networking in the community. Similarly, the Economic Development Administration, an agency of the Department of Commerce, helps support small businesses by providing grants and technical assistance in order to promote entrepreneurship and economic growth.
A number of large corporations such as FedEx and LendingTree award grants to small businesses or start-ups. While some grants are reserved for non-profit startups, there are also corporate grant opportunities geared toward for-profit businesses.
In addition to government agencies and nonprofits, there are also grants from individuals, foundations, and nonprofits. You can find these grants by looking through lists of grants like this one from NerdWallet.
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