Having an exciting and innovative idea for a new business is meaningless without the funds and capital necessary to get the ball rolling. Finances are the core of a successful business plan, and while there are plenty of sources of capital to consider, the best way forward will vary from business to business.
“Anyone can start a company, put up a website, and create a Facebook page,” writes Tim Burd, a contributor for Entrepreneur, “but what determines where that company will stand six, 12, or 18 months down the road, is not only sales, but the funding and capital behind the business.” Financing a new business can seem intimidating at first, but there are dozens of avenues for a budding entrepreneur to explore.
Family and Friends
One of the most common sources of startup funds for a new business will be the entrepreneur’s family and friends. There is good reason for this; you have already built relationships with these individuals in your personal life, so they may be more inclined to invest in your new business. There are a few things to keep in mind when approaching family and friends about acquiring an investment, however.
“When you turn loved ones into creditors, you’re risking their financial future and jeopardizing important personal relationships,” according to Inc. “A classic mistake is approaching friends and family before a formal business plan is even in place.” This is an important point and one that can easily be overlooked during the early stages of building a business. It is important to both your business and the health of your personal relationships to bear in mind that when you come to friends and family for money, there is a chance that they may not see that money again for a long time — or not at all.
Even without lending personal capital, family and friends can help stretch the budget further than you would have been able otherwise. “Word of mouth is always the leanest way to acquire your first customers, create your network, and begin your entrepreneurial journey,” writes Burd. When trying to start a business, getting the word out is essential, and family and friends can help with that whether or not they open their pocketbooks.
Loans — Large and Small
Although the restrictions around securing bank loans are tighter now than they were in the past, they can still be an essential source of seed money. “Banks such as J.P. Morgan Chase and Bank of America have earmarked additional funds for small business lending,” according to Inc. While this can be a great resource to tap, there is some amount of planning and deliberation that is required to see that money.
“If you do decide to contact a bank for a small business loan,” writes Drew Hendricks for Forbes, “make sure you have as many details about your proposed business as possible.” It is much more difficult to convince a bank to loan you money than it is to convince family and friends, so it is important to come to them with a solid, convincing business plan.
Another option is the microloan, defined by Inc. as “a small business loan ranging from $500 to $35,000.” While they typically come with a higher interest rate than a standard business loan, they are also easier to secure, as they come from microlenders rather than banks. “Microloans are really for that startup entrepreneur or an entrepreneur in an existing business facing a capital gap who needs to secure capital for new equipment or to service a contract,” Connie Evans, president and CEO of the Association for Enterprise Opportunity, told Inc.
A Culture of Crowdfunding
Crowdfunding — defined by Tim Burd at Entrepreneur.com as “a centralized way for startups to reach out to a large audience in their niche to make their prototypes or ideas a reality” — is another way to acquire startup capital while avoiding the pitfalls of a business loan. Websites like Kickstarter make it possible to not only crowd-source startup capital, but also promote your product or service at the same time.
However, as Inc. points out, crowdfunding “isn’t about long-term funding. Rather, it’s supposed to facilitate the asking for and giving of support for single, one-off ideas.” Donors do not receive a return on their investments, but, as pointed out by Tim Burd, they may get to “test, utilize, and help innovate what you are working towards.”
Many Avenues for Startups and Entrepreneurs
Although raising startup capital might seem like a daunting task at first, there is no shortage of ways to acquire the funds you need to get your business up and running. There are angel investors, who lend funds in exchange for equity in the company. Credit cards are another option for filling gaps in capital or covering sudden, unforeseen expenses. There are government loans through the U.S. Small Business Administration — a choice for those who fail to secure a loan through a bank.
With so many options available to entrepreneurs, it is well within your grasp to bring your business ideas to life.
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Entrepreneur: Startup Capital: 6 Ways to Fund Your Businesses
Inc.: 10 Ways to Finance Your Business
Smart Business Funding: 4 Great Tips for Finding Funding for Your Startup