Small business might seem relatively unimportant in the grand scheme of things, yet it is a very powerful engine that drives much of our economy. If it is purring, the economy is doing well but if it is hissing and growling, then we’re all in trouble. Successful small companies contribute to our economy by providing jobs for thousands of people and, if people have jobs, then the economy is healthy. However, first and foremost, you will need to obtain capital, which is probably the most difficult part of getting up and running. As a result, small businesses and startups have to be creative and explore a variety of options when looking for funds. Essential to your success is having a complete and thorough business model or plan that identifies clearly the specific nature of the business, projections for the future and highlights your own salesmanship/ leadership skills. We’ve all seen Dragons’ Den- no plan, no money; it’s as simple as that.
So, once you’re sure you’re ready, where do you get the money? Well, often entrepreneurs start by begging their friends and family to invest in their enterprise and, although this can be a good starting point, it is unlikely to be the be all and end all of your money issues as one funding source is usually not enough. So, where to get the rest? First of all, regardless of the size of your start-up, you must be flexible, realistic and practical about the various financing opportunities that are available to you.
Here we have summarized FIVE various financing options often used to obtain that all important, required capital:
Do it yourself (DIY). Many entrepreneurs often use their own savings or resources, initially, to self-fund their projects until some other form of financing becomes available. Sometimes, entrepreneurs use zero interest credit cards or leveraging personal assets to get started. This is very risky and not the recommended path- pretty scary, in fact. If you are confident in your vision and plan, you can, however, invest your own savings (note the word “savings”). Such personal investment can actually attract other potential investors as it demonstrates a very real commitment to the business. Investors understand that no one wishes to lose their own money! Keep future profitability in mind (base this on real numbers, not fantasy).
Ask around. Friends and family might actually be interested in and believe in your venture and your ability to actually realize it. If your plan is sound and you’re a good salesperson, they might even be willing to invest money. Jackpot! This source of financing is quite popular among entrepreneurs. There is a very real disadvantage, however, to tapping family and friends as there is the possibility that your business could go belly-up and fail, thereby running the risk of ruining personal relationships. Sorry, but this is possible and, in order to avoid your in-laws never speaking to you again, it’s better not to borrow too much money. Ask for just enough to launch your business operations or create a website. It’s also important to make sure that all parties understand the risks. Sound legal advice is a must; otherwise, the funding can potentially cost you much more in the long run. Do your due diligence upfront or live to regret it.
Small business loans. Bank loans are one of the first options that come to mind when thinking about starting businesses. However, getting approved by the bank is often a rocky, uphill journey that often ends in blisters! Banks are incredibly strict about lending money. If you have a sound financial history, some assets to use as security, it is definitely a good option- be prepared for some bruising along the way though. Those bankers are a tough crowd!
Venture capitalists. Finding one won’t be difficult- they are everywhere! Convincing one to invest in your business is the tricky part. If you can get a venture capitalist to listen to you, be well prepared. Pay great attention to detail, have a thorough business plan, be transparent and support every statement with real projections, real facts and figures. If you do not do this, you are dead in the water! Your potential investor has to trust you and see the evidence. Remember, they’re already successful and you’re trying to be. Something to keep in mind: not every investor is right for you; they are not all the same. If they partner with you, they will also own part of your business and you will have to act in both the best interest of the business and its shareholders. You might not always agree about what “best” interest means, so make sure you know what your investor expects.
Purchase Order Financing. If you already have confirmed orders from new clients, yet don’t have enough funds to fill the order, you should consider Purchase Order Financing (PO Financing). Turning a client away simply because you can’t afford to complete the job will undermine your customer’s trust. Bye- bye customer. To avoid such a scenario, it is imperative to find the required funds quickly. The main benefit of PO Financing is that the lender primarily considers the creditworthiness of the company which actually placed the order and their ability to pay for the goods. If your profit margin on the order is high enough, the lender can cover up to 100% of your expenses, allowing you to complete the order on time, thereby helping you build a strong relationship with your customer. That’s good business.
In conclusion, regardless of the source you choose initially, there is a good chance that you will make use of a few of these financing options at one time or another as your business starts growing. After all, you will need to be financially stable in order to grow and develop and, yet again, that means money- it’s always about the money! So take your time considering all the options. Find the right one for you. Think with your head, not your heart. The business might be your dream but it is not your investor’s. And, good luck.