Getting enough money to fund the business ideas and activities that make up your business is one of the most important factors to get right. While you need dedication, hard work and adequate planning, you cannot set up and flourish without money.
There are different ways to get money to start a new business idea. From savings, external investments, grants, or taking on business loans.
This guide evaluates the most popular funding options and discusses how to make a final decision. Need to know the best method to get enough money for your business? Keep reading!
1. Use Your Personal Savings
Personal savings is the first consideration when thinking about starting a new business. Most people check what they have in their accounts to know how much more they need.
If you don’t have enough at the moment, but have a great business idea, you may decide to keep saving whilst working on your plans. Then when you have enough in the bank, it could be time to take the plunge.
There are risks to consider in using your own savings to fund a business idea though. If the business fails, you stand to lose your savings and have no way to recoup the money spent. On the other hand, starting a business with only your money gives you full control over the finances and a huge sense of achievement seeing your initial investment grow into a sustainable business.
You do not have to worry about paying back a borrowed sum or giving up any equity in your company.
The first step to deciding whether to use your savings is estimating the cost of the setting up. You must have at least sufficient funds to run the business for a year or you’ll be running at a high risk. Having surplus funds can help to withstand the financial impact of whatever issues come up.
2. Get a Loan from Friends or Family
Reaching out to financially buoyant family members or friends is another way to get funding for a business. The primary advantage is the possibility of getting loans with zero or very low interest. Families and friends are those who have trust in you and believe you will be able to pay back. However, the amount they can afford to loan out might be relatively low because of the little risk involved.
By borrowing from friends and family, your relationship with them is at risk if the business plan fails and you cannot pay back as agreed. It can damage your reputation with them and place them in a difficult situation.
Planning is necessary to determine the exact funds you need and the repayment idea for the proposed loan. Have a conversation with interested friends and family about your business idea. If a friend agrees to loan you money, put the agreement and terms in writing. It’s best to maintain professionalism in business even when dealing with friends.
3. Get a Small Business Loan
A business loan from a financial institution or money lender is a common option for many who aim to start a business. You can secure a loan from any of the available banks, credit unions or online lending services. These financial institutions are great for loans because it is their line of work, and all you need to do is navigate the application process.
Typical information that you will need to provide during the application includes your business information, plan, financial statements and credit history. The lending services use those details to know your chances of paying back and how much you might be comfortable to repay.
Most small business loan service providers also have low interest rates compared to other types of loans. You get to save up in the long run and repayment is easy, especially with a long repayment plan.
The downside of business loans is that they can be difficult to secure if you have a bad credit score. In these cases, you will probably be asked to submit a collateral or asset like your home or a landed property as a guarantee if something happens to the business and money. Different lenders have different offers available and some will specialise in supporting poor credit or low income businesses, so shop around to find the right match for your needs if looking into small business loans.
- Secure Funding from a Venture Capitalist
Another way to get funding for your business is to seek a loan from a venture capitalist. These are individuals or firms with an interest in sponsoring high-risk and high-reward businesses. The target companies of venture capitalists are those with a business model that promises quick investment returns and rapid growth.
During the loan application, the business owner has to agree on a percentage of ownership with the sponsoring capitalist. This BBC report on the TV programme Dragon’s Den is a good illustration. The major benefit of getting funds from a venture capitalist is how quickly you can set up your business.
This type of funding has its downsides too. Starting with the share of control over the business. Venture capitalists with stakes in the business can take advantage of the opportunity to make claims and decisions that are not totally in the best interest of the business. Since they usually have a percentage share of ownership, they may also pressure a company to immediately sell its ownership if something goes wrong.
That is why you must have a solid business plan before approaching a venture capitalist for funding to start a business. The business plan must indicate expected numbers for the company’s growth. You should also do your research to see what maximum percentage of ownership they can have.
5. Secure Private Equity Funding
Private equity firms operate similarly to the venture capitalist. They prioritise high-risk, high-reward companies but are usually larger with more investment capital. Compared to venture capitalists, private equity funding sources get involved in the day-to-day business operations and not just the profit.
Securing a loan from private equity funding also has its disadvantages. Like venture capitalists, they sign a contract for an agreed percentage of the business ownership. Private equity funding providers value high returns on investment and might not hesitate to propose selling the company if their invested funds are in danger. Another disadvantage is the debt already owed by some private equity funding houses which can affect your accounting sheets.
Only contact a private equity firm when you have a solid business plan on the potential investment returns and growth. You should have also made up your mind to share a part of the company’s ownership. Accounting experts also recommend you have an exit strategy on how to later pay off the firm.
Additionally, be careful of your choice of private equity firm and confirm their reputation and history with past contracts. It is necessary to get funding for your business but do not be hasty to enter loan contracts without due diligence. Your business plan must also include an exit plan to allow the private sponsor to recover their investments plus interest.
6. Find an Angel Investor
An angel investor is a private individual or partnering group interested in investments in small businesses in exchange for equity stakes. Getting funding for your business from them can sometimes be difficult especially when they require a viable business plan that shows high growth potential and an achievable exit strategy. You must be able to prove that your business is profitable.
The possibilities are high with an angel investor since they pump enough capital for the business growth. You could even be fortunate to secure funding from an angel that has solid industry knowledge and experience. The connections of such sponsors can significantly ease business operations but there is the fear of how much control they might want to have in the business.
We recommend that you have a legal representative or qualified accountant to understand the terms of the equity stake. Every agreement must be properly recorded to avoid ownership conflicts later down the line.
You can start looking for angel investors today by checking within your industry or pitching at startup events. Ensure your business plan and pitch deck are comprehensive enough to attract the best investors.
7. Create a Crowdfunding Campaign
Crowdfunding is a relatively new way of getting funding for a business that utilises small investments from lots of people that adds up to a generous sum.
For instance, a small startup that aims to solve a recurrent challenge in a community could set up a crowdfunding page to attract the voluntary interest of investors in that area. The simple idea of crowdfunding is having many people contribute small amounts which results in a bigger amount.
Although it is an excellent idea, the common difficulty is reaching your target savings goal through crowdfunding due to the small amounts that are often pledged.
You need a platform to set up a crowdfunding account and the popular platforms for that include Kickstarter and Indiegogo. These services allow businesses to pitch their products or services to the general public and receive funding support from interested individuals.
Before choosing the crowdfunding route, ensure you have a well-defined strategy for product or service deliveries. There should be a verified quality claim and unique selling point (USP) to attract the audience you want. Interested donors can decide to crosscheck the promotional content and that is why you must have done good research before crowdfunding.
You should also set only realistic crowdfunding goals to encourage people to contribute. Some people can be reluctant to add their quota if they feel the overall amount is exaggerated and not realistic. You must also have a plan B in case you do not meet the set targets.
8. Use Business Credit Cards
A business credit card is another way to fund your small business idea and access cash when you need it. Business card users also enjoy valuable perks like air miles, airport lounge access and cashback.
The main goal of the banks administering the credit cards is to get paid back with interest. Having a reliable financial history or track record of assets owned and managed can increase your chances of getting a business credit card and you should always aim to pay off the total amount in full each month to avoid interest charges or late payment fees.
Look out for credit cards with 0% interest periods or no fee balance transfers to make credit cards work for the business in the most economical way possible.
One major downside of using business credit cards is their high interest rates which can accumulate if you miss out on early payment schedules. As a small business owner, it is important to have sufficient balance every month to avoid running into bigger debts.
Late payments or defaulting on payment deadlines can also damage your business credit score. Financial advisors often suggest using the business credit card for only business expenses and ensuring prompt payments. In addition, keeping a card balance below 30% of your credit limit can help to maintain a good credit score.
9. Obtain a Government Grant
While they are more competitive to obtain, a government grant is an excellent funding source to start a business. The grants are usually awarded to startups engaged in products or services that greatly benefit the immediate public and community development. Examples are businesses involved in research and development, export promotion or environmental protection.
The UK government gives a substantial amount of these grants annually. The common ones are the Research and Development Tax Credit, the Small Business Research Initiative and the Regional Growth Fund.
A particular reason for the competitiveness of government grants is that they are free. Unlike business loans, funds from venture capitalists, or angel investments, you do not owe anyone equity stakes or a repayment plan.
The application for government grants is free and open to every interested business owner once the registration window is open. You can start by filling out the form and submit for assessment by the panel of experts. The review process can take several months and we encourage you to apply early enough for optimal consideration. If successful, you will be contacted so that funds can be made available to you.
Final Thoughts
There are plenty of ways to get funding for a business. The route you take will depend largely on the amount of money needed, your appetite for risk, and how much debt you’re willing to take on.
As illustrated, every funding route will have its pros and cons, so every business owner must weigh up the benefits and negatives that they will face when deciding how to inject cash into their business.
Personal savings can be a good starting point but you should be open to try alternative methods like business loans and government grants. Whichever route you choose, having a solid business plan and financial projections to a prerequisite for attracting external investment and will also help to ensure that income and outgoings are properly reviewed and kept in check.
This level of planning services as a helpful resource for banks, lenders and investors who are considering whether to help with financing your business.
