When it comes to launching your own business you might have a great idea, but one of the first problems that you must deal with is how to fund your business, since almost no business can operate without adequate cash flow. In fact, this is one of the main reasons that some small businesses fail. They simply run out of money, and it isn't profitable to operate.
It can be common for a business to have expenses and outgoings that are higher than its income in the early days. When writing a business plan, it is a good idea to account for this fact, but often, many small business owners underestimate how much money they will need. The harsh truth is that often you need a lot more money to launch a business than you might realize.
The good news is that whether you’re a new business entrepreneur or a start-up company looking to launch or expand further, there are several ways to secure business funding. This guide will provide an overview of the main ways loan options available to help raise money for your new business.
When launching a new business, the first option that most people consider is whether they have enough money to launch a business using their own personal finances or wealth. Some lucky entrepreneurs can seed their business with this method, and for others, it is possible to launch a business idea with very little money. However, this is not an option for all people.
Sometimes an entrepreneur will use their own personal credit card for small business funding. However, the monthly payments on credit card repayment debt can be very high, and if you run out of money and fail to make the repayments on a regular basis, this can have a negative impact on your credit score. Due to these concerns, using this method for funding working capital, isn't really recommended.
If you don't have the money to fund your business idea yourself, and you don't want to go down the credit card route, the next option that is frequently considered is borrowing money from friends and family.
There are some positives and negatives associated with funding your business using this method. On a positive note, it can be good to get your friends and family involved in your business, and often when it comes to repaying loans, the interest rate is normally very favourable. In fact, it might even be possible to get an interest free loan, with indefinite repayment terms on this kind of loan.
The downside is that if your business is not successful and you lose your friends or family's money then this can cause upset and a lot of personal problems. Ultimately, this is why a lot of people have the rule that they don't mix business with pleasure.
If you do want to go down this route, then it is worth ensuring that you draw up legal paperwork for the agreement to protect both you and the third-party that you are borrowing money from. Having the agreement written down can avoid a lot of the 'he said, she said' issues that can occur when two parties make a verbal agreement that is open to interpretation further down the line. For instance, you may want to discuss if the cash is going to be a long term or short-term loan and what the repayment schedule will look like.
Crowdfunding is another method to consider as a business funding option. This can be a good way to raise capital for a business idea or project in some situations. Often it works well when the idea is popular with a wide number of people, who are interested in giving a small amount of money for an incentive. This could be early access to a brand-new product, or some kind of reward. This doesn't work well for all types of business, and you end up having to deal with a lot more individuals than you would if you used other forms of investment, such as equity investment.
Some of the other downsides to crowdfunding is that there is often an expiration date on the funding round, and if the target isn't met, then no money is received for the project at all. This can limit many businesses from launching, since they first must wait to see if their funding goal will be met, It’s also worth noting that often, the money that can be raised is a lot lower than it might be from other funding methods. In addition, business ideas need to be marketed on crowdfunding sites since there is a lot of competition out there for investment.
Grants are the cheapest way to finance a start-up company, but these paperwork-heavy application processes can often be headache inducing.
It is worth exploring the potential of grants if you are starting up a business as it can be a good source of money for your business. Grants typically operate both nationally and locally, so you may find that there are organizations where you are based looking to support local businesses. This option might work if an entrepreneur is flexible as to where they locate their business and are open to situating their business in a new location or area.
Often grants are set up to help promote certain business types, or activities. So, you can find grants for start-ups but often you may find that the grant will focus on an industry that either needs a boost or is related to a particular location, such as agriculture. Other grants are designed to support community led initiatives, such as charities and nonprofits.
As good as an idea that grants seem, the truth of the matter is that few grants are awarded, and for those that are, the funding can take more than a year to be released. This timeline isn't really an option for many entrepreneurs who have a business idea. They typically want to bring their business idea into life as fast as possible, and any delay could mean that a competitor could fill the gap in the market in the interim.
Another type of funding option are traditional bank loans, which are usually granted to well-established businesses that can provide security to borrow against and can prove a prior history of credit, stability, and financial growth.
These criteria make it hard for a start-up business to qualify for a small business loan, even if it’s only for a relatively tiny sum. With lenders general reduction of their loan programs in today’s struggling economy, the approval rate for high-risk loans is becoming more improbable.
In fact, it can be difficult enough for a small business to get even a debit bank account with some traditional financial institutions and online lenders, let alone a loan from them. If you already have bad credit, then the chance of securing a business line of credit will be impossible.
A third source of business funding is equity. Business angels, or private investors, can provide start-up equity, called seed capital. For young companies, private equity investors are a great source for securing initial financing.
For the investment needed to launch a business, a business angel will take a share of the equity contained within the business. Longer term they will aim to sell their equity stake for a large profit. Investing in a brand-new business can be risky, but angel investors weigh-up that risk against the potentially large profit that they can make.
Business angels can provide seed capital to help launch a business. This type of alternative lender can also offer their business expertise and contacts to help their investments grow. This can work well for a brand-new entrepreneur who has a good idea and the skills to make the idea work but doesn't yet have the business know-how that they need to truly make their venture successful. This is where business angels often come in to support their investments.
Once the business is off the ground and proves that is has high-earning potential, then entrepreneurs can seek venture capital, another form of equity in which a group of investors usually pool a large amount of money for shares and a stake in the company’s operations.
Venture capitalists typically look for funding opportunities in businesses that are looking to grow and expand and move on to the next level after start-up.
If you already have an established business and are exploring financing options for your business, then venture capital investment might meet your business needs.
If you're an entrepreneur that is looking for a funding solution for your business, then the Angel Investment Network might be just the thing that you're looking for.
Our global network is designed to connect investors and high net worth individuals with entrepreneurs from all over the globe.
Entrepreneurs that are looking for small business financing can sign-up to our network and post details of their business idea, to attract business angels to their business venture.
AIN helps investors and entrepreneurs build lasting and profitable relationships to build better businesses and brighter futures.