A new business needs all sorts of things to survive, but above all else it needs money. Without money, you cannot hire additional workers, maintain a website, own office space, and so many other things. And so many potential entrepreneurs want to know where they can obtain funds to turn their great ideas into reality.
There are multiple ways to get those needed funds, each with their own advantages and disadvantages. Here are some of those methods, and figure out which one will work best for you.
The simplest method is to fund the business yourself, otherwise known as bootstrapping. This is not as impossible as you might think, as Entrepreneur writer Martin Zwilling points out that businesses often do not need as much cash to start out as they think they do.
If you can do it, bootstrapping carries many benefits. It encourages you to think efficiently and creatively, and to make the most out of every cent. It means that there is no investor looking over your shoulder as you have complete control. And when you do eventually seek an investor, they will feel more confident in your business if you show that you have sunk something into your new business.
2. Friends and Family
Many potential business owners will turn to a wealthy relative or friend for a small loan, knowing that person is more likely to give the money than a bank. But I cannot stress enough the risks and downsides of this approach. Money can irreparably damage strong relationships, as anyone who can watch siblings fight each other over their parents’ will can attest. In fact, Money Crashers lists several excellent reasons for why you should never lend money to someone for their great business idea.
If you decide to take this approach, treat it like you are applying for a loan from a bank. Explain how your business model works, how it will succeed, and when you can expect to repay the money. Don’t just say “later” to that last point. Proper communication in advance will help your business and keep important relationships strong.
Instead of going to a single institution or person, you can now turn to the Internet to get your business funded. With crowdfunding, businesses can go on websites like Indiegogo and launch a campaign to raise money. A good crowdfunding campaign will tell a story, have an idea which appeals to the public, and provide regular updates to show the progress you are making. Unlike other types of funding, you do not need to refund donations or give away equity, but most crowdfunding campaigns offer perks such as an early version of the product in exchange for donations.
Crowdfunding can carry risks. As you are relying on emotional crowds for your funding, they can turn on you for any reason and wreck your business’s reputation. You also need to invest significant resources into a crowdfunding campaign which you may not when applying for a bank.
Never think that your idea is too boring for crowdfunding, as there are successful campaigns for items like travel bags and earphones. It all depends on how you market it.
4. Small Business Loans
Loans remain the best way for a business with some history to take the next step forward. The best loan for those who can get is the Small Business Administration’s 7(a) loan program. While the SBA does not directly lend money, it can connect you to lenders who offer longer terms and smaller payments in contrast to heading to a bank yourself.
If your business does not need hundreds of thousands of dollars, you can also obtain a microloan of up to $50,000 using small business lending which can be used to purchase additional equipment or supplies. Keep in mind that the SBA loans set strict rules on the kind of business it will loan to, and you must prepare loan documents ahead of time. These include bank statements, tax returns, and balance statements which detail your business’s finances.
5. Business Incubators
New business do not need just money, but advice and business incubators are a good way to get both. Business incubators or accelerators are organizations which provide office space and help fledgling businesses get connected with investors and other businesses which can help them grow such as accountants and lawyers.
Most incubators are specialized in one type of business, and you will have to do some searching to find the incubator which will help you the most. Checking in with the local Chamber of Commerce or searching the International Business Innovation Association is a good start.
There can be a great deal of competition to join an incubator, so make sure that your finances are well documented like you would when applying for a loan. But if you can join, an incubator is a great way for new businesses to gain access funds, mentors, and all the other things you will need to succeed.