Starting a business requires financial investment. One of the initial and crucial decisions for most business owners is securing funding. The way you decide to finance your business can impact its structure and operations significantly.
Calculate The Amount Of Funding Required
Each business has unique requirements, and there is no universal financial solution. Your individual financial circumstances and your business goals will determine the financial trajectory of your company.
Finance your business independently through self-funding
Also referred to as bootstrapping, self-funding involves utilizing your own financial resources to sustain your business. This can involve seeking capital from family and friends, using your savings, or accessing your 401(k) funds.
By self-funding, you maintain full control over the business, but you also bear all the risks alone. It is essential to avoid overspending and exercise caution when considering tapping into retirement accounts prematurely. Doing so could result in costly fees or penalties, jeopardize your retirement timeline, so it is advisable to consult your plan’s administrator and a financial advisor beforehand.
Acquire funding from investors through venture capital.
If you are looking to start your business, investors can provide funding through venture capital investments. Typically, venture capital is given in return for a stake in the ownership and an active role in the company.
Compared to traditional financing, venture capital differs in several key aspects. Venture capital usually:
Targets high-growth companies
Invests money in exchange for equity, not debt (it is not a loan)
Accepts greater risks for the possibility of higher returns
Has a longer investment timeframe than traditional financing
Most venture capitalists will typically require a board seat at the very least. Therefore, be ready to relinquish some control and ownership of your company in return for the necessary funding.
Ways to secure venture capital investment
Securing venture capital is not a surefire process, but typically involves following a standard sequence of fundamental steps.
Seek out an investor Search for individual investors, also known as "angel investors," or venture capital firms. Conduct thorough research to ensure the investor is reputable and has experience working with startup companies.
Present your business plan The investor will assess your business plan to ensure it aligns with their investment criteria. Most investment funds focus on specific industries, geographic regions, or stages of business development.
Undergo due diligence The investors will examine your company's management team, market, products and services, corporate governance documents, and financial statements.
Negotiate the terms If they express interest in investing, the next step is to agree on a term sheet outlining the terms and conditions for the fund's investment.
Receive the investment Upon finalizing the term sheet, you will secure the investment. Once a venture fund invests, it becomes actively engaged in the company. Venture funds typically invest in "rounds," providing additional financing as the company achieves milestones, with price adjustments as the company executes its plan.
Use crowdfunding to fund your business
Crowdfunding involves raising funds for a business from a large group of individuals known as crowdfunders. Crowdfunders are not considered investors as they do not acquire a stake in the business and do not anticipate a financial gain from their contribution.
Instead, crowdfunders anticipate receiving a token of appreciation from the company in return for their support. This token often takes the form of the product being developed or other exclusive benefits, such as interacting with the business owner or being credited. This aspect has made crowdfunding a favored choice for individuals looking to create artistic projects (such as a documentary) or a tangible item (like a cutting-edge cooler).
Crowdfunding is appealing for business owners due to its minimal risk. It allows you to maintain complete control of your company, and in the event of a failed project, there is typically no obligation to reimburse the crowdfunders. As each crowdfunding platform varies, it is essential to carefully review the terms and comprehend your complete financial and legal responsibilities.
Obtain financing for a small business
If you wish to maintain full control over your business but lack the necessary funds to get started, you should consider applying for a small business loan.
To improve your chances of obtaining a loan, it is advisable to have a solid business plan, detailed expense sheet, and financial projections covering the next five years. These resources will assist you in determining the amount to request and will reassure the bank that providing you with a loan is a wise decision.
Once you have prepared your documentation, reach out to banks and credit unions to apply for a loan. It is important to compare offers in order to secure the most favorable terms for your loan.
Utilize Lender Match to discover lenders that provide SBA-guaranteed loans.
If you are facing difficulties obtaining a traditional business loan, consider exploring SBA-guaranteed loans. In cases where a bank deems your business too risky for lending, the U.S. Small Business Administration (SBA) can provide a loan guarantee, reducing the bank's risk and making it more inclined to approve your loan application. Utilize Lender Match to discover lenders that provide SBA-guaranteed loans.
