You got your marvelous business idea that’s going to impact the world. Now it’s time to finance your business.
You’ll need a financial plan unique to your company’s mission and vision. Aaron Sims says, “Finances should be organized by the type of business. For example, a manufacturing business will need more money upfront for raw material, equipment, and labor than service-based companies.” So think about what products or equipment you’ll need or what people you’ll need to hire. Once you’ve calculated how much startup funding you’ll need, here are different strategies for getting it.
The most common ways to finance
“If your business is already operating, cash flow management is vital and the optimal way to finance your operation,” says Aaron Sims. Aaron is a financial advisor with 15+ years of experience helping entrepreneurs and small business owners identify and resolve finance-related obstacles.
“In other words, collecting payments from customers efficiently and stretching payments to vendors can be the difference in needing a loan. Business owners should think of financing as a tool for growth, not staying alive.” The most common ways to finance your business’ growth are self-financing, investors, crowdfunding, business loans, and grants.
Aaron tells CADA, “Self-financing, otherwise known as bootstrapping, is cash from your personal net worth or income from another job.” Essentially it’s your own money from your savings account, 401k, or piggy bank. With self-funding, you retain complete control over the business, but you also take on all the risks. So before tapping into your retirement accounts, be mindful of the chance you’re taking.
The best part of a grant is that you don’t need to pay it back. So keep in mind, the competition may be higher.
Look into iFundWomen, a startup funding company for women entrepreneurs where they have rolling grant applications. Or research grant opportunities from companies that are looking to give back. The skincare company, cocokind, provides financial grants to female entrepreneurs in health, wellness, and sustainability industries who are focused on creating social impact through business.
Furthermore, participate in pitch competitions. Pitch competitions allow you to pitch your business idea to an audience of investors and other influential people. Often, the winner will receive a cash prize. Plus, there are supplementary benefits to doing this. It is an excellent opportunity to build connections with future investors, hone your pitch, and build brand awareness.
“There are hundreds of investors for each type of investor out there. Network, join associations, or google to find people to finance your business,” recommends Aaron.
Friends and family
Friends and family are often key investors. Share your company’s story and see if friends and family resonate with it. Suppose they believe in it as much as you do; you can then ask for financial backing. The advantage of financing your business this way is that “it is often considered a donation of sorts,” Aaron continues, “but other times they can act as angel investors.”
An angel investor is a person who provides capital for a business startup or expansion. “Angel investors are usually early-stage investors who have cash available and are looking for a big return,” tells Aaron.
The pros of this approach are that angel investors are willing to take on higher risk than most investors. Additionally, the resources they give does not work like a loan. Therefore, if your startup isn’t successful, the angel investor won’t expect you to pay back the money.
Note that angel investors aren’t lending money as an act of kindness. They invest money in hopes of earning more through equity. According to The Balance Small Business, “An angel investor typically looks for a return of around 25 to 60 percent.” Meaning when your company starts earning a profit, they will get 25 to 60 percent of that profit.
“Typically, venture capital investors will invest closer to your company being validated or your product passing proof of concept,” says Aaron. In exchange for their funding, venture capitalists may ask for large chunks of equity and to be lead investors.
The most notable difference between angel investors and venture capital investors is the amount they invest and the level of involvement venture capitalists like to have with their portfolio companies. Aaron shares, “Venture capital checks are normally larger as they typically come in later rounds of fundraising where the risk is perceived lower.” As your company meets certain milestones, additional rounds of financing may be necessary to achieve optimal growth metrics. Again, it depends on the type of business.
Increasingly popular is crowdfunding, where a group of people invests rather than one or two. Different crowdfunding approaches include donations (like GoFundMe), debt, or equity-based. Aaron says, “Loan-based crowdfunding means that investors get their money back, usually with interest. And with investment-based crowdfunding, people put money in, generally for a share of your business. So they’ll see the value of their shares rise and fall, but you don’t need to pay back their investment.” To run a successful crowdfunding campaign, you need to capture the attention of a large number of backers and convince them that your business is worthy of their investment.
Small business administration (SBA) loans can be used to purchase expensive equipment or pay operating expenses. You can apply for a loan at SBA’s partnering lenders such as banks, credit unions, community development organizations, and micro-lending institutions.
The benefit of SBA loans is that you keep full control of your business. Moreover, Aaron finds that it comes with a much lower cost of capital.
Once approved, you will have all your funding readily available. In comparison, venture capitalists will share a limited amount of resources with each round.
There are some limitations as to who can receive funding depending on the loan program’s eligibility requirements. Usually, businesses need to be for-profit, do business in the U.S., have already invested time or money, or meet size standards. However, the lender will provide you with the full list of requirements.
As an entrepreneur, you’ll have to carefully choose the best financing option for your sustainable business goals. If you need more guidance on how to finance your business, message us at email@example.com so we can connect you with Aaron.
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