Starting a business is like driving a car. You just bought the car of your dreams and have spent money and time learning how to drive before the car arrived. Yet, there is one more thing you need before the car can move – fuel. Regardless of how good the car is or how skilled you are in driving, if there is no fuel in the car, it goes nowhere. The car represents the business idea, and the driving skills are the business-related education and experience you have acquired. The fuel without which the car will not move is the capital (funding) needed for the business idea to kick off.
Bringing a business idea to life typically requires financial investment, which, depending on the idea, may not be within your capacity to self-finance. Business funding from external parties is an excruciatingly trying task for first-time business owners who only have their ideas to present. Investors want to be sure that they are not pouring their money down the drain; therefore, they often seek a form of assurance that first-time entrepreneurs do not always have. Thus, entrepreneurs shy away from big business ideas to avoid the tricky business of funding.
The importance of funding
However, it costs money to start a business, no matter how small. And securing funds for your business is probably the first huge challenge you will have to deal with before your business can set off.
Your decision regarding funding your company could have an impact on how you set up and manage it. Self-funding (also called bootstrapping) is the most popular way to raise funds, it may however not be sustainable for huge business ideas with the attendant risks. Investing all of your resources in one idea is seldom a wise course of action, especially when it comes to financing a new business. Broadening your sources of funding will increase your start-up’s resilience to potential downturns and increase your chances of obtaining the right financing for your specific requirements.
First, make all necessary findings and determine how much you would need to fund your business. Different businesses have different needs and knowing what you need money for will guide how to raise and manage the money. Here are six sure ways to secure funding for your business:
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Love Money
Aside from bootstrapping, another traditional and trusted way to raise finance for your business is through loved ones – hence the name. Love money comes from friends, spouses, parents, siblings and other family members who agree to support your idea financially.
It is important, however, to treat it seriously to avoid family conflict later in the future. Be transparent and share a detailed business plan with them explaining your business idea, your capital needs and the risks involved. Get them to sign a contract specifying whether the fund is a gift, a loan or an investment, the method of repayment, and the conditions underlying their returns.
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Crowdfunding
Crowdfunding is an ancient method of fundraising that has recently become trendy with the incorporation of technology. It is simply the small contributions from a large number of funders which could amount to a huge amount of money enough to fund your business. There are different forms of crowdfunding: equity, reward-based, and donation.
In equity crowdfunding, the funders expect to get a stake in the business, so they tend to look for established businesses. Reward-based crowdfunding promises a form of “gift” for the funders after the business has started. The gift could be a free or discounted product from the company, an invitation to an event, or just an official acknowledgement. Whereas donation crowd funders expect nothing in return for their money.
Crowdfunding is a low-risk and interest-free way to raise funds for your business, the only condition being that your idea is sellable to potential funders.
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Peer-to-Peer Lending
Peer-to-peer funding is a special form of crowdfunding where a group of people (investors) pool resources, mostly through monthly donations, to loan money to a member of the group for business purposes. It is similar to cooperative and thrift societies. The money comes with an interest rate similar to traditional banks but with little or no collateral. The beneficiary must, however, have a good financial record in the group.
Some Fintech platforms also provide peer-to-peer funding solutions for businesses seeking investors, although the beneficiary may have to provide full information about the business. Some form of security may also be demanded as collateral. Care must be taken to guarantee the credibility of a peer-to-peer platform before applying.
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Business Grants and Subsidies
There are private and government-sponsored business grants from time to time that you can access entirely for free. The catch is that there are often criteria that you must meet to be eligible for funding, and many qualified contenders. Grants may be area, gender, industry, or product based. Some grants come as a lump sum, while some are paid in installments for specific needs. The key is to find grants and subsidies that you are eligible for and have all your business documents ready to apply.
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Business Loan
Bank loans for small and medium-scale businesses are fit for businesses that have already started and have a healthy financial record. To qualify for a bank business loan, you must provide your business plan, financial records and five-year projection document to prove the dependability of your business. Bank loans come with a pay-back interest rate, and you retain full control of your company.
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Angel Investing and Venture Capital
Angel investors are wealthy, experienced professionals who are willing to invest in start-up ideas for a percentage of control in the business. Venture capital firms, however seek fast-growing start-ups (usually tech companies) to invest in for a percentage of equity and control. Investors and venture capitalists bring in huge funds, but you must be ready to relinquish some amount of control of your business.
There are other ways to secure financial support for your business, including business incubators that provide workspace and equipment for start-ups, asset financing where you get to acquire equipment on hire-purchase or lease, and more. Whichever way you decide to fund your business, remember that funding is like planting a seed; the seed still needs other things to grow into a tree. Get all the other resources you need to establish your business and patiently tend it until it becomes profitable.
BIPOC Foundation runs a Financial Modelling and fundraising program with various demos and toolkits weekly. Get access here. Follow @bipocfoundation on Instagram, Facebook, LinkedIn and Twitter.