A Beginner’s Guide to Funding Your New Business
Winston Churchill said that “Success is not final, failure is not fatal; it is the courage to continue that counts.” Thank goodness for wise thought leaders like Churchill who knew that entrepreneurs of the future would need those words. Especially during the dark days of gathering startup funding.
MBAs, Venture Capitalists and any entrepreneur that does their research knows that it takes money to make money. According to this blog on the Small Business Association website, there is not an exact number on how much it takes to fund the startup of a small business however depending on the industry, it can be as little as $1,000. If you’d like a more exact estimate on your business’s start costs, use this calculator.
Now that you’ve figured out your startup costs, the really important question needs to be answered: “Where will I get this money from?”
The first and most obvious option is saving the money yourself and funding your own startup. I used this option when I started my first business and, although I have personal experience with funding my own business, it is something that should be avoided if possible. If you’ve already started your business with your own funding and have run out of money these techniques and strategies can still be applied to fund your business now.
Go Fund Me campaigns aren’t just for perpetual obituary collections and sob stories. Many businesses have actually been launched with a crowdfunding campaign. But! Before you rush to register, there are strategic steps that need to be followed before introducing your company to this funding approach:
- Make a donation plan. The most successful campaigns are planned many months even years in advance. Create a donation tier plan and decide on the content, gifts, and letters that you will send to your contributors.
- Explain your why. Most viral campaigns include a video montage explaining the history, story and “why” of the company. Evoke emotion, and let your contributors know how they are making a difference in your company’s trajectory. It may pay off well later to invest in a well produced video to attach to your campaign.
- Expand your social circle. Most campaign contributors will be people you personally know. Make sure that you are reaching out to family and friends and ask them to share your campaign as well as contribute at least $5. If you get just 50 people to contribute that amount you already have $250 towards your goal.
If crowdfunding doesn’t seem like your style but the thought of others funding your startup is still appealing, receiving funding from investors may be an option for you to look into. There are plenty of venture capital firms looking to invest in promising small businesses like yours in exchange for equity in your company. There are however, qualifications that must be met before you even have the opportunity to pitch to potential investors.
Once those qualifications are met it should be noted that you may get the opportunity to pitch to a room of investors, have private one-on-one’s with a couple and still receive nothing. If you do find a interested benefactor, there are definite strings that come with your new seed funding.
Venture capital firms make their money via management fees and carried interest. What this means for you is that you will have to pay to have your money professionally managed by the firm. “Carried interest” is when an investment is successful. A “carry” represents the share of the profits that is paid to the fund managers.
If all of these stipulations are okay with you then it’s best to approach a local or niche-specific firm first. An example would be a firm that invests in women-led businesses only. This will help you with meeting those initial qualifications and give you access to leaders in your industry.
The last option to source your startup funding is through a loan from a bank. This can be a personal or business loan and, depending on the type of loan and your personal or business credit history, your interest rate can fluctuate.
If you choose this option, there are companies like Nav or Fundera who can help you with estimating which bank will give you the most money and best interest rate. Before you sign that application, construct a clear plan on how to pay back your loan:
- Find out how much you need and
- Only borrow that amount.
Many people have ruined their personal credit from taking out loans for their business. You can avoid their mistakes with strategic planning and conservative spending habits.
The startup phase of your business is perhaps the most important time period of your business’s history. By having a clear arrangement for funding in place, you not only will give your business the best advantage for survival but you will also give yourself the peace of mind in knowing that you aren’t hurting your personal credit while trying to fund your dreams.