The basics of financing your first business
Financing a business in any economic climate is challenging, but trying to raise capital for your first business can feel like an impossible mission. And given the current business environment, securing funds for a venture, even if based on an innovative idea is tougher than ever.
But getting financing for your company is an essential factor in starting a business, and you cannot skip it. You’re one of the thousands of people who start companies this year, and while your business idea may be unique, you have something in common with all the other entrepreneurs, you need money to cover your corporate expenses.
The following lines address the most popular ways to raise capital for your business, along with some important tricks you should remember when you jump into the process.
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Ask your friends and family for money
Getting financial support from family and friends is one of the most common ways to finance a business. But you have to be careful because when your family and friends become your creditors, your relationship changes. After all, you’re risking their financial stability. Don’t approach them before you have a formal business plan in place to present them with all the company’s details.
To prevent jeopardising your personal relationships, create formal financial projections like an evidence-based assessment that tells them when you pay your debt. This way, none of you experiences unpleasant surprises, and you show them you’re serious about your company.
Before asking them for money, consider how you want to structure the arrangement. Do you want to get a loan from them? Do you offer them equity? Tell them what the risks associated with the venture are and let them know that investing in any business is chancy and there is a chance to lose their money. It’s best to discuss these details before you get money from your uncle Ben, and not surprise them for the Thanksgiving with the bad news the business failed.
Find an angel investor
Working with an angel investor is an old technique, and the old rules apply even today. To attract one, you need to create a concise business plan, present your business in clear language and have an exit strategy to show them they can protect their finances. The economic turmoil the business world is dealing with has made the process of attracting angel investors more complicated, but you can still do it. Here is how.
– Work with professionals. Seeing people with experience in your management team encourages investors to trust your idea and support you financially. Sometimes even an experienced adviser can help your business grow even if they don’t provide you with money.
– Show them that you’re not a fad-follower. Before looking for an angel investor, determine why you started this company in the first place. Are you passionate about what you do? Or are you finding it just another mean to make money? Angel investors have experience in working with young entrepreneurs and they can immediately spot if your intentions in building a business out of enthusiasm and passion aren’t genuine.
– Show them you know what you’re talking about. If you expect a successful investor to support your idea financially, you need to provide them with competitive analysis, market assessments, and marketing and sales strategies you intend to adopt. You’re starting a new company and you need to show them that you own expert knowledge in your domain and the required discipline to follow with your business plan.
– Stay in touch with them. At the moment, your business idea may not seem profitable for the angel investor, but if you improve and present it again, they may find it interesting. You can ask them to point at the loops in your business plan that stopped them from trusting your company.
Get a loan
There are organisations, different from banks, that offer small business loans. Online lenders have less strict leading standards than classical financing organisations, but make sure you check their conditions to determine if they fit your needs. Before signing a contract with a lender check the terms and conditions, and consult a business specialist to understand what you’re signing. Don’t sign the contract if you don’t fully understand what happens if you fail to pay the loan, or if you want to pay it faster.
Crowdfunding can be a solution
Many online websites offer entrepreneurs the opportunity to apply for crowdfunding. Kickstarter is one of the online platforms that allow you to raise money if your business implies relatively low costs. You set a goal for how much money you want to increase over a period of time, let’s day $2000, over a determined period, like one month. People can use the website to offer money and help you fund your business. Kickstarter is known for funding projects in all industries, from music to science. But this is only a temporary solution, so you still need to search for another option to cover your expenses.
Crowdfunding is a great solution when you need financial help to support a single idea. Some project creators offer incentives for the people who help them. For example, if you create handmade jewellery, you can offer a pair of earrings to everyone who gives you $20.
You can also try factoring
This method requires to sell your receivables at a discount to get money fast. It’s an effective method many companies use to deal with poor credit. But it’s not the most effective way to raise capital. When you sell receivables, you pay a fee, that’s a percentage of the total amount you gather. This is why some entrepreneurs prefer other solutions because they imply fewer risks.
You should remember that all these ideas have different benefits, and their viability may change as the economic climate changes. Your business will require capital more than once because funding is an essential growth condition. Before choosing a solution, check its unique rules and understand what the process would imply for your business.