Last updated on November 27th, 2017 at 10:22 pm -
So you’ve come up with a great, new, and original business idea for a brand-new start-up. Congratulations! Maybe you’ve got a brilliant new invention, an amazing product no one has ever seen before, or an unbelievably innovative new service that’s going to change the way things are done in the industry of your choice. Unfortunately, you can’t just sell your idea- you will need to obtain capital for business start up and build a successful business around it.
Whatever industry you’re getting ready to break into, you’re going to need to find a way to raise seed capital to get your new business off the ground. You’re going to have significant expenses that will have to be dealt with effectively by obtaining start up financing. You’re going to need to hire employees, invest in facilities and equipment, and develop an effective advertising campaign to get the word out. On top of that, if your plan requires team management, you’re also going to need funds for small business administration needs. That means raising money. But how?
There are many ways to address the start-up cost of your business and drum up funds for your new enterprise to effectively curate the capital that you are going to need in order to succeed. The route that’s best for you, your business, and the people counting on you will depend on your personality, your talents, your available resources, credit rating, existing capital, and of course- your business model. Here, we will discuss the many methods that you can use to raise the money you will need to get your venture started.
Capital for Business Start Up – Source 1: Boot Strapping
One of the simplest ways to raise capital for business start up, if not the simplest, boot strapping means using your own money to fund your business start-up. There are several advantages to funding yourself. For example, you will be able to retain complete control over your company by forgoing any reliance on investors and you will avoid paying interest on loans. The disadvantage is that your business will most likely grow more slowly, and you will probably need to keep things very simple for a longer amount of time. Of course, some people will simply not have the funds to start a business this way and will have to look to outside help to start a business.
Unfortunately, this is one of the most difficult ways to fund a small startup business- unless you were born with a particularly silver spoon in your mouth. It is only in rare instances that the proprietor of a startup is able to get started without investing any of his or her own money. You needn’t necessarily spend a fortune to start your company- or bankrupt yourself in the process of getting your business off the ground by providing your own business financing.
The total sum of your own cash that you will have to spend will depend on the nature of your startup and your unique circumstances. However, you may consider your own monetary contribution your bid to yourself and make your personal contribution a priority.
Fortunately, there are a number of alternatives and additional routes to funding that it would behoove you to consider. More often than not, you will need to use a combination of your own personal savings and outside investment to cover the full costs of obtaining all of the business startup capital you need.
Capital for Business Start Up – Source 2: Small Business Startup Loans
You may also choose to obtain the capital you need by turning to a bank or start-up business loan provider. You will incur interest on your loan and you will be expected to repay the loan at a rate and schedule agreed upon by you and your lenders. Suppose, for example, that you need 1 million dollars to get your business off the ground. Your lender may charge you a 5% interest rate on that amount. Each month, you would be expected to pay back $50,000 in order to maintain the agreed upon schedule of repayment. Different lenders will have different rates of interest as well as varying terms, credit standards and other qualification that you will be expected to meet.
There are several options from a small business loan, to a short-term loan, to a business expense account that you may consider. You may be issued a special credit card in order to spend the money in small increments depending on the type of loan you take. Be sure to research your options fully before signing. Shopping for the best lender means comparing available terms and the qualification standards of each. Lenders will compete for your business, but will still operate only within the level of risk that they can tolerate.
A small business loan (SBL) from a traditional lender can oftentimes come with some surprisingly good terms and very competitive interest rates. This depends, of course, on the condition of your credit rating and credit profile as well as the type and value of the collateral that you are able to offer. This is the primary reason why you must have a well-written business plan that you know well, can readily articulate, and have copies of to offer up on short notice.
More often than not, these types of loans will be your best bet for obtaining the capital for business start up . If you are approved for a traditional loan from a bank or other financial institution, it will also be a great opportunity for you to improve your credit standing as well as driving the success of your new business. One automatic bonus you will also enjoy is the fact that when you secure a traditional loan it will encourage other investors to view you as a legitimate company worthy of their time and contribution.
Capital for Business Start Up – Source 3: Investors
Investors are another viable option to fund your business. There are two to three types of investors you can look to for funding. Typically, your investors will become a partner to you in your business endeavor. They will expect to make money based on the amount they invest in you. The more they invest, the more they will hold influence over your enterprise. There are two traditional types of investor; angel investors, and venture capitalists. Both will give you an amount of startup capital in exchange for a portion of your company’s equity. These types of investors are widely considered to be best ways to secure venture capital and, more often than not, they are the hardest to secure. But that doesn’t mean that you shouldn’t try.
Some of the investment companies you encounter may have clear directions and strict limitations on the way you will be permitted to deliver your pitch. This can be intimidating, but if you follow the procedure as instructed- it may give you an extra opportunity to impress that you might not get with a more laissez faire investor. Others may seem to just appear out of nowhere, like an angel, and offer you an opportunity that you may not have expected.
In order to have the best chance of gaining the attention and interest of lucrative investors like these, you will have to have a mind for marketing and for public relations. Making yourself visible, through trade shows, conventions, using social media, and of course just being in the right place at the right time are all important aspects of getting the attention of these individual investors.
Capital for Business Start Up – Source 4: Venture Capitalists
A venture capitalist provides equity. This is a variety of financing that is provided to businesses that the venture capitalist deems to have significant potential for growth or that have demonstrated high growth through revenues or growth- ie; hiring employees, maintaining an office space and so on. If you’ve seen the popular program Dragon’s Den, you’re probably familiar with the idea. Like the panelists on the show, a venture capitalist will want to see proof of sales and will need to be convinced of the value of your product, service, or business model.
The amount of equity that a venture capitalist investor takes will depend on an appraisal of your company. Go back to the 1 million dollar example we mentioned earlier. Suppose you meet with a venture capitalist who appraises your company at around 4 million dollars. Because the amount of investment you’re asking for is 25% of your total company, the investor will likely expect to receive 25% control over your enterprise in what is called the ‘pre-money valuation,’ and 20% ‘post-money valuation.’ The average venture giant will not enter into the process until your business has some proven traction so that he or she will not be taking on more risk than they are willing to be exposed to.
Capital for Business Start Up – Source 5: Angel Investors
An angel investor is (usually) an affluent individual who is willing to provide start-up capital in exchange for ownership equity or convertible debt. An angel investor will generally enter into the investment process at an earlier point than a venture capitalist would. Angel investors, therefore are essentially defined as an investor who extends cash flow to a start-up company without requiring the same degree of demonstrated value.
To put it another way, an angel investor is an investor who has ‘faith’ in the ability of the entrepreneur to grow their business, to be profitable, and to make the investment worth the inherent risk. Angel investors are willing to invest in your business when it is little more than an idea. These individuals will frequently be a friend, relative, or just someone in your community, (rather than a venture capital firm), who wishes to make an investment in someone who will bring value to the community through their entrepreneurial endeavors- like you.
Capital for Business Start Up – Source 6: Equity Crowdfunding
This is a relatively new form of investor model. It is sometimes referred to as an Angel Group or Angel Network. Popular examples of a crowdfund platform are Patreon, Go Fund Me, and Kickstarter.
With these online platforms, the entrepreneur creates videos, white papers, and other materials that potential investors will discover through a type of social networking environment. After a potential investor is satisfied by what he or she sees, they then decide to commit an amount of business start-up capital of their own choosing. Once a sufficient number of investors has come together to raise capital for the business, the business owner will announce that the amount sought has been reached.
At this point, is it typical for the group of angel investors to be given special access to the business owner’s process, early access to products, and special offers previously discussed in the original campaign materials.
If for one reason or another you are unable to qualify for a business loan, there are many crowd funding related options to generate capital for business start up. You will need to do plenty of research and choose a reputable platform with a proven rate of success. This is a new, somewhat experimental, and considerably less orthodox way to obtain start-up financing, but it has worked beautifully for many new business proprietors in similar circumstances to your own. You will just need to be certain that you carefully review all of the terms of service and interest rates. Also, seeking legal counsel on the potential risks would be in your best interest.
Capital for Business Start Up – Source 7: Family and Friends
While these types of investors are really a type of angel investor, this is a mode of funding that deserves some extra attention. Many entrepreneurs will naturally shy away from seeking the help of friends and family to cover their costs for a variety of reasons. But when you can get it- this arguably the best route to obtaining venture capital that you could hope for.
Many people fear they will come off like beggars, placing those close to them in an awkward position and potentially putting the relationship at risk. However, if you really believe in your business-startup and have good reason to believe in it- then there should be nothing to fear.
If you are able to make a high-quality pitch to your family member or friend, a professional presentation which will show them that you are serious and are not just trying to leverage the relationship- it should go well, and you should not lose face- even if the person chooses to turn you down. The idea is that you present yourself as a real professional, and show them that you regard them as a real investor- because that is what they are.
If your business does as well as your projections claim, then, in the end, you will have made your relationship with your family or friend stronger than before by adding new value to both of your lives through your team effort.
Of all the options described above that are available to you, consider each carefully. Complete your due diligence by fully researching every opportunity for the best terms and the best match to your unique needs and situation. Do not assume boot strapping alone is the only way to sustainable success. Taking on some risk, and inviting others to share your success is a great way to start building networks and partnerships that will serve you and your business for many years to come.