July 2022
You’re ready to start your business and your question is “Where do I get the funds to do it?” There are many ways to get money to start and grow your business. A lot depends on where you are in the process, your goals, and how great your cash requirements are.
If you are just starting, you will most likely use your own funds to take the initial steps. As money needs increase, you will look to additional investment options.
There are three main ways to get capital for your business:
- Bootstrapping
- Debt and Equity
- Crowdfunding
Lets explain each in more detail and how and when to use them.
Bootstrapping
Bootstrapping is a popular method to fund your business, especially at the very beginning. It is done solely by self-financing using your own capital, personal savings, cash flow, pre-selling, or credit cards.
It can be used whether you’re just starting a business or you already have revenue and want to grow. It is most often the method used by start-ups because it’s easy and available, especially when your business idea is not capital intensive.
The advantages to bootstrapping are that you have total control over the decisions relating to the business, you own all the equity and income, you don’t have the pressure of repaying a loan with high costs and stressful terms and conditions, and you don’t have an equity investor to deal with who may want to be involved,
The most significant advantage is that you can start and run it as a side hustle around a job that keeps paying your salary and gradually scale up your business. You can take it as fast or slow as needed and start getting income before quitting work.
The disadvantages are that the business may take longer to grow, you have to pick your priorities, be more careful with the expenses you incur, make all the decisions yourself, and take financial risks.
But, as long as you can move forward with your business and have the funds needed, you should bootstrap as long as possible.
One of the most famous examples of bootstrapping is Sara Blakely, the founder of Spanx. She started her business with $5000. from her personal savings and still owns 100% of the company. She was totally self-funded and used the sales of her products to grow her business. Now she’s a billionaire.
Now, this won’t happen for every bootstrapped business, but the possibilities are endless.
However, if you need more money than you can provide on your own, look to the next options.
Debt and Equity
Debt and equity both provide funding through outside means. Debt is money you have to pay back with interest. Equity is capital you receive in exchange for giving ownership in your company.
This category includes sweat equity, borrowing from friends and family, finding a partner, independent investors (Angel investors), loans, and grants.
With these options, you will have obligations to those providing the money. There may be requirements or covenants that must be met, and possibly management involvement.
Sweat equity. This is often used to exchange shares in the company with someone who provides an essential service to the business. They provide the work needed and negotiate how much that is worth in the ownership you give them. This also is used when you need to hire someone and can only offer a lower salary plus a stake in the business.
Family and friends. This is an ideal way to raise money for your business. It is a major source of funds representing 38% ($60 billion ) of startup money. It is a great way to get capital because they generally believe in you, want to help you succeed, and may represent a long-term investment.
However, it is tricky because friends and family may love you and believe in you, but later on, things can get complicated, especially if the business is doing very well or very badly.
The remedy is to put everything in writing at the start. Make it clear whether the money is an investment that will be paid back, and define the terms, an equity position in the business that provides ownership, or a gift. Don’t fall into the trap of believing that just because it’s your brother or best friend, they will understand. Maybe they will, but a written agreement will set expectations straight from the beginning.
Finding a partner. If you know someone you want to partner with then form a solid working relationship. You should expect to share the work and the expenses, but also the profits and the decision-making.
This is a great choice if that partner adds something to the business like money or expertise that you don’t have.
Angel Investors. Usually, wealthy private investors who use their own money to invest in new businesses. They are knowledgeable, understand the difficulties of a startup, and don’t expect compensation right away.
The benefits of angel investors are that they deal with smaller investments, usually under $1 Million, do not often get involved with your business, may not ask for a board seat, and invest for the long term. Also, their expertise and contacts can act as mentors to you and the business.
This is an opportunity to explore when you’re looking for additional capital. Make sure you do your research and understand the terms they are offering. You may find angel investors at local events and chamber of commerce meetings. You can check Upfront or the USA Angel Investment Network to locate potential investors.
Loans. A loan is given by financial institutions, mainly banks and needs to be paid back. Banks rarely give loans to start-ups because of the risk involved, and if they do they will ask for collateral like the equity in your house, car or another asset.
The Small Business Administration (SBA) provides loan guarantees with lower rates and reasonable terms but are competitive. They help you find potential lenders where you can apply for a loan if the lender shows interest in your business.
Grants. Small business grants offer free money to start or grow a business. Most federal grants are available to businesses in specific fields, such as science, technology, environment, or health.
There are too many potential programs available to explain here, so look at this resource for more info. Best Small Business Grants for Free Money in 2022.
Venture Capital. I include Venture Capital in this list, even though it is not the right option for startups and most businesses. They provide private equity for larger amounts of money.
Generally, VCs want to be involved with your business, have a board seat, have large returns on investment, and for you to go public. If you’ve started your business because you want freedom, create an asset, and a legacy for the future, then venture capitalists will be as limiting as the job you wanted to get away from.
Crowdfunding
Crowdfunding is a great option for small business startups. It has made starting a business possible instead of being hampered by a lack of sufficient capital.
Crowdfunding is getting the funds for a project, business, or venture by attracting small sums of money from lots of people. It uses your audience, friends, family, and social media followers to grow your business instead of traditional debt or equity. This is your audience and the people you’ll market your campaign to.
It is competitive, so you’ll need a good product or venture. A good product needs to meet a need, solve a problem, excite people, or all of them.
You’ll want to decide what kind of funding you’ll ask for, fixed or flexible. Fixed funding means you only keep the money if you raised 100% of your goal, whereas flexible funding means you keep whatever you raised, even if it doesn’t meet your original goal.
There are several popular platforms available to host your campaign. The two most significant are Kickstarter and Indiegogo, but hundreds are available. You should research which one will be best for your product.
There is a lot to consider in creating your campaign, setting goals, and writing a project page. In next month’s post, we’ll discuss them in more detail.
Summary
There are many options to fund your new business that can fit any need and situation. You have the choice to self-fund, find investors, take on a loan, or get the support of your fans. But whichever way you go, the good thing is that capital need not be an obstacle to your creating your dream.
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