You are sitting on a great idea for a small business. You are ready to take the plunge and put your business plan into action. You are going to need money to do it.
Seeking finance for your small business is the first big hurdle that every aspiring small business owner must take if they are to make their dream a reality. Thankfully for you, there are many avenues one can explore for funding, each with their own unique benefits. Is a traditional bank loan what you are seeking, or is a more modern approach like crowd funding better tailored to your needs?
Here are 8 practical ways you can finance your start-up idea, taking it from a dream to reality.
The most traditional form of financing for a small business is the bank loan, with loans on offer from $5000 up. Banks are highly competitive in the small business space, eager to make the process of applying for a loan as simple as possible.
There are some helpful tools available which will assist in comparing the multitude of bank loan products available. Online sites like Canstar, Finder, InfoChoice, and Mozo provide simple, easy-to-use services that will help you cut down on complex research as you find the product that suits you best.
Funding a small business through credit cards is fairly common, with research finding that credit cards are one of the two most common financing approaches used by startups with fewer than five employees. Credit cards are among the easiest and quickest way to get your business off the ground immediately, but is this an approach to finance that will harm you far more in the long term?
The interest rate on a credit card can be punishing for those that let themselves get too deep into debt. And the personal cost of using credit cards to fund your startup needs must be considered. After all should your business hit a bad patch and it becomes difficult meeting the repayments, your credit card debt can negatively harm your personal credit rating.
Credit cards have an awesome immediate advantage if you need just a small amount of money to get going, but be wary of the long-term consequences.
Raise Money From Family and Friends
The obvious benefit to raising money from friends or family is that you will have a very low interest (but likely no interest) repayment to make and you can avoid the hassles and fees associated with a bank loan.
Accepting money from friends and family is a risky endeavour, in that it does have a strong personal component that can have adverse consequence. Friction can easily develop, so it’s important to establish the realities of the investment from the very beginning:
- Is this a loan or an investment?
- What is the level of risk involved?
- How much money should they expect to receive in return?
- When should they expect to see it paid?
All of these questions need to be established and answered before you accept money from a friend or relative. As you blur the boundary between a personal relationship and a business relationship, you want to ensure that you don’t destroy either relationship.
Most angel investors get involved in the very early stages of a company’s development, seeking a substantial share of the company (expect it to be in the region of 20-25%) in exchange for capital to launch the company. Often an angel investor will be well versed in the industry you’re launching in, able to provide not only finance but also strategy and networking intelligence.
Before accepting an investment from an angel investor, any small business owner needs to ask themself whether the relationship will be fruitful beyond the initial cash injection and whether that money is worth giving up a stake in the company for.
By now we are familiar with small business success stories from crowd funding sites like Kickstarter or Indiegogo. For start-ups with a product idea that they wish to bankroll without needing an angel investor or want to reduce their level of risk by ensuring there is demand for a product before moving into production, crowd funding sites provide a great way to go to market without immediately taking on debt.
Before embarking on a crowd funding campaign, it’s important to establish that any promises offered can be met. Will your target provide you enough finance to actually produce the product that you’ve promised? Can it be delivered in the promised timeframe? Will your product match the expectations of the consumer? Are you able to physically meet the demands of distributing your product and any ancillary gifts (promotional t-shirts, mugs, etc.) to your backers?
One of the most common complaints given by those who have run successful campaigns is how exhausting fulfilling the orders of backers can be. If you don’t have an external group providing distribution, this is something you need to undertake yourself.
If you are successful with your fundraiser, benefits can be felt beyond simply having a successful product launch/fundraiser. The crowd funding campaign can itself serve as marketing, establishing a relationship with your backers who can then go on to serve as brand ambassadors for you.
There are many companies in the online space seeking to establish themselves as disruptors to traditional lending institutions. As such, it’s never been easier or quicker to get approvals for unsecured loans from professional lending companies.
There are also companies like Loandesk which algorithmically connect individuals with the right loan from a lender. Loandesk are an interesting company in positioning their business with the end-user (ie. those seeking the loan) as their primary focus.
Of course, as with any loan it is important to examine the terms and repayment structure of the loan. Don’t let the ease and convenience of applying for the loan blind you to the costs associated with repayment.
Sell or Rent Your Assets
Consider your own assets and what value they may have. Do you have a second car that isn’t being used very often? Could you get by without a car at all? This is a very easy way to generate some quick seed money to get your small business idea off the ground.
Some entrepreneurs have looked to services like Airbnb, renting out spare rooms or their entire home. If you are able to find somewhere else to stay, renting out your home over the weekend to visiting Airbnb’ers can provide some bursts of cash.
The Government can provide established and prospective small businesses with free/low cost advisory services, but there are a number of grants regularly made available. The Business.gov website provides an easy to use search engine of all available government grants and their applicable states. Many of these grants are geared toward skill building/development, improving professional standards, disability wage subsidies, and relocation enticements. The grants may not provide you with the finance required to get your start-up off the ground, but they may prove beneficial in building and evolving your business once the initial steps have been undertaken.