The Best Ways to Fund Your Business
By: Melanie Shires, PCC
As an entrepreneur, you understand it costs money to start a business and how you fund it will be the first and most important financial decisions you will make when launching your business.
Every business has different needs, and no financial solution is one size fits all. Your personal financial situation and vision for your business will shape how to set up its financial future. This is one of many reasons why you need a business plan, since it will give you a clear picture of what it will take financially to operate and price your products or services.
In this article you’ll learn the various ways to fund a business. Once you know how much capital you’ll need, you can then determine the best way to procure it based on your specific set of circumstances.
Self-funding or Bootstrapping
Self-funding, otherwise known as bootstrapping, lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends (here is a good article to reference) for capital, using your savings accounts, or even tapping into your 401k.
Self-funding may take a lot longer and you take on all the risk yourself, but you retain complete control over the business. Be careful not to spend more than you can afford and be especially careful if you choose to use tap into retirement accounts early. Doing so could put you at risk to owe expensive fees or penalties, or damage your ability to retire on time — so you should check with your plan’s administrator and a personal financial adviser first.
Small Business Loan
Consider getting a small business loan if you want to retain complete control of your business, but don’t have enough funds to start.
To increase your chances of securing a loan, you need a business plan, expense sheet and financial projections for the next five years. These tools will give you an idea of how much you'll need to ask for and will help the bank know they’re making a smart choice by giving you a loan. Make sure you shop multiple banks and credit unions to compare offers and get the best possible terms for your loan.
Small Business Grant
Another option is applying for a small business grant. Grants.gov is a searchable, online directory of more than 1,000 federal grant programs. This might be a long process, but the good news is it doesn’t cost you any equity.
Sometimes power is in numbers, and a bunch of small investments can add up to something major. Crowdfunding raises funds for a business from a large number of people, called crowdfunders. Crowdfunders aren’t technically investors, because they don’t receive a share of ownership in the business and don’t expect a financial return on their money. Instead, crowdfunders expect to get a “gift” from your company as recognition for their contribution. That gift is often the product or service you plan to sell.
Crowdfunding is popular because it’s very low risk for business owners. Not only do you get to retain full control of your company, but if your plan fails, you’re typically under no obligation to repay your crowdfunders. Every crowdfunding platform is different, so make sure to read the fine print and understand your full financial and legal obligations.
Local Angel Investor Groups
Venture Capital Investment
Investors can give you funding in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in your company.
Venture capital differs from traditional financing in a few important ways. Venture capital typically:
Focuses high-growth companies
Invests capital in return for equity, rather than debt (it’s not a loan)
Takes higher risks in exchange for potential higher returns
Has a longer investment horizon than traditional financing
Almost all venture capitalists will, at a minimum, want a seat on the board of directors. So be prepared to give up some portion of both control and ownership of your company in exchange for funding.
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