Having a great idea, seeing a need in the market, and using your skills to create a new business or startup is half the battle. The other half of the battle is managing the actual logistics of running a business.
There’s so much that goes into starting a small business: product development or refining your service, creating a detailed business plan, constructing a marketing strategy, building a website, hiring the right people, acquiring customers, and of course figuring out the startup costs (which includes a sales forecast).
Being a business owner requires a lot of energy and time, but let’s face it, what will really keep you up at night is money. You need capital in order to get your business up and running, especially in the early stages to give you a competitive advantage.
The good news is that you don’t have to hope you win the lottery or receive a large inheritance. There are multiple ways you can get startup funding for your business development efforts until you have consistent revenue.
Let’s look at seven sources you can explore to fund your business idea.
1. Conduct some preliminary research
Before you decide on what approach to take when it comes to financing your business, take the time to draft a detailed business plan or enlist the help of an accountant to create one for you. A business plan will help you develop your business model, focus on your target market, and create a sound company budget (e.g. expenses, sales forecast, and profits).
Ultimately you have to know what you’re working with and how much financing you’ll need to reach your business goals before you start looking to raise external funding. If you don’t have a business plan it could lead to missed opportunities. When looking for early-stage funding, a business plan can also include cash flow and financial forecasts to support your efforts.
Starting a business can feel extremely overwhelming, that’s why we suggest finding a business mentor who can provide you with business advice. They can be a great sounding board, help you develop your ideas for growth, and help you navigate challenges by sharing their skills, expertise, experience, and even contacts. On top of that, business mentors can give you strategies for funding your venture.
2. Use what you have
It’s common for entrepreneurs when they’re starting off to use “bootstrapping.” Bootstrapping means you’re financing your business with personal funds and current resources, such as personal savings, home equity lines, credit cards or even lines of credit.
The upside of bootstrapping is that you won’t have to worry about extensive loans or monthly payments. This is especially true if you don’t have copious amounts of money to begin with and can’t take on large payments. Some entrepreneurs continue to use this method until their business is profitable and has consistent revenue.
The downside to this approach is that it can hinder you from quickly scaling your business. The advantage to bringing in external funding is that it gives you a cushion when your funds run out and increases your business’ growth potential.
3. Consider your closest contacts
Asking those closest to you for financial assistance may seem like an unnerving task. Friends, family and even acquaintances may not be able to fork over thousands of dollars to assist you, but they may have some extra cash lying around to fund your venture.
Since there’s already built-in trust and support from these individuals, they may be more likely to say yes. Of course, being professional about this will help preserve your relationships with these potential investors.
This is where your business plan comes in handy. You can go in-depth about your business goals, business model, company budget, and how much money you need.
It’s also crucial that you’re specific about whether it’s a loan (e.g. the interest rate and how you plan on repaying them), an investment (e.g. they get a stake in the company and if they have a say in any business decisions), or a gift (no strings attached and you wouldn’t be repaying them).
4. Try crowdfunding
In order to reach your business financial goal, an alternative source of startup funding is crowdfunding. Crowdfunding involves raising money from a large number of individuals via the internet (this is especially common for early-stage companies).
There are many crowdfunding sites which give you a platform to raise money from supporters and the best part is that they could be from anywhere in the world!
Keep in mind that in order to be successful with your crowdfunding campaign you need to set realistic goals, create a compelling story for why your business deserves funding, and inspire supporters to spread the word about your venture.
You can even create perks and bonuses for those who pledge a certain amount of money, but just remember that fulfilling rewards can be costly and time-consuming, especially if more people pledge than you expected.
It’s important to understand the way these sites handle campaigns. For example, some let you keep the funds regardless of whether you made your goal or not while others return the funds to donors.
The fees the sites charge for running your campaign, and how to best set up your crowdfunding marketing strategy. Your marketing strategy can include social media, email marketing, networking groups, and word of mouth to promote your crowdfunding campaign.
5. Seek out an angel investor
An angel investor is an established businessperson who provides financial backing to businesses they feel are promising and will flourish, with the belief that they too will reap the financial rewards.
If you have a lot of initial costs (e.g. hiring people, office space, supplies) and need more capital to really get your business going, then getting the attention of angel investors might be a good route for you.
An angel investor can invest a lot of money to help make your business ideas become a reality.
They can even provide valuable advice to help with your business’ growth potential. If there are many angel investors interested in your business, you could consider equity crowdfunding – whereby a broad group of investors fund startup companies in return for equity.
While it’s great having many investors give you money, equity crowdfunding will own a small share of your business.
The drawback to angel investors in general is that they’re unlikely to be a “silent partner” and more of an active investor by expecting detailed accounting reports. There could be the potential that the two of you clash when it comes to business goals and creative freedom, resulting in the demise of your business.
6. Apply for a business loan
Business growth (e.g. new product development, recruitment, and marketing) requires additional funding. That’s where a business loan comes in handy for startup funding. Business loans are a form of debt funding and usually require monthly instalments over a set period of time, with interest on top. With a business loan you could get anywhere from £1,000 up to potentially millions.
Business loans can either be secured or unsecured. A secured loan is linked to an asset like a property or anything you own, and if you can’t repay the loan, the lender can take your asset in order to pay back the loan. In contrast, an unsecured loan has no collateral. You can apply for a business loan from a bank or the government.
With a bank loan you’d be borrowing a set amount of money over an agreed period of time with interest (secured loan). Government funding is unsecured, has a fixed interest rate, and can be repaid over a period of one to five years. Note that you can also apply for business grants through the government that don’t need to be paid back.
Here are some factors to consider before applying for a business loan:
- How much money would you like to borrow?
- Do you have a detailed business plan showing how the money will grow your business?
- How much can you afford to repay every month?
- How long will it take to fully repay the loan?
- Do you have a good credit score?
7. Venture into bigger capital
If you’re seeking some serious startup funding and looking for potential investors, you’ll need to turn to venture capital. A venture capitalist is similar to an angel investor, but they typically invest much larger amounts, often on riskier businesses (hence “venture”) in hopes of greater rewards when your business takes off.
You’ll need an in-depth business plan detailing your business model, pricing structure, target market, and sales forecast, because competition for venture capital is fierce. Venture capitalists typically invest in a few different companies on behalf of their clients and that means they see a lot of pitches.
In order to get investors on board, make sure that your investment pitch stands out from the crowd. Venture capitalists are also looking for a return that’s anywhere from three to 10 times their initial investment, usually within the next five to seven years. Make sure you highlight how they will get that return when they invest in you.
Venture capital funding is seen as a high-risk asset class since a large portion of these investments fail. This is why venture capitalists spread their funding across multiple businesses, so that they aren’t putting all their eggs in one basket.
When it comes to business development efforts, there’s a lot to keep in mind, from business planning (including intellectual property, sales forecast, and having a marketing strategy) to financial responsibilities including determining how to fund the business (which can involve multiple funding rounds).
Early-stage funding can include your own personal savings, loans from investment banks, and potential investors (e.g. family, angel investors, donations from crowdfunding, and venture capitalists).
Get help early on
If you need help developing a solid business plan and understanding how to best fund your startup, you can request a consultation right here from one of our London Chartered Accountants. Knowing where you stand and what you’ll need in order to run successful business ventures is crucial to set you up for success and capture the attention of investors.