Starting a new business is exciting, but attracting the funding necessary to get it up and running can be both stressful and confusing. There are dozens of options you can use to get money for your emerging business, each with strengths and weaknesses. So how should you go about getting the funding you need?
Let’s start by looking at some of the most popular options for business funding.
One of the most obvious routes is to fund your business on your own. If you have access to significant resources, this is a straightforward possibility; you can tap your savings to start a business, or tap into a retirement fund. Obviously, you’ll need to be careful dipping into your retirement fund, since there’s no guarantee you’ll make your money back.
If you don’t have significant savings, you may be able to take out a personal loan. Again, you’ll need to be careful, since you’ll be personally liable for paying back that loan, even if the business goes under.
Alternatively, you could hit up friends and family members for low interest loans or donations to get your business up and running. Finances can put a strain on personal relationships, so this may or may not be advisable.
In any case, self-funding the business gives you more freedom and more potential options, but it’s not viable for businesses that are capital intensive. If you’re making a partial contribution to your business, you may hybridize self-funding with other modes of funding.
Private Equity and Venture Capital
Though they may seem similar, private equity and venture capital are two separate concepts. In private equity, private equity fund managers raise capital from limited partners that consist of a variety of sources. Then, using these funds, fund managers will invest in a business (oftentimes an existing business) for a period of three to five years.
By contrast, venture capital firms tend to invest much earlier in the development cycle, and are more likely to focus on tech companies, or startups with high long-term potential.
Either way, you may have to forfeit partial ownership of your company to attract this type of funding. You may also need to submit to certain terms or conditions, like following the direction of your investment partners as the company grows. For many businesses, the injection of funding and long-term support are well worth these downsides.
An increasingly popular option in recent years is crowdfunding. Depending on what you’re developing, you may be able to take advantage of product-based crowdfunding, where you’ll attract donations to create a specific product, or equity crowdfunding, where your monetary contributors will earn a stake in your company in return for their donations.
Crowdfunding seems easy to manage, but different platforms may have strict requirements that limit what you’re able to do. Additionally, there’s no guarantee that you’ll be able to raise the capital you need; crowdfunding success is often dependent on the strength of your marketing and PR campaigns.
Making the Decision
If you want to come to an informed decision about how to finance your business, take these steps:
- Look at your personal finances. First, take an honest evaluation of your personal finances. If you don’t have much in the way of savings, or if you’re struggling to make ends meet, it’s a bad idea to take out a loan or add more financial stress to your personal life.
- Project your expenses accurately. Next, take the time to project your business expenses and startup costs accurately. With a decent financial model, you’ll be much more likely to attract the funding you need—and less likely to over-fund or underfund the business. Talk to a financial advisor if you’re having trouble coming up with a plan.
- Consider your personal priorities. What’s most important to you in this business? Would you be willing to sacrifice some of your freedom and autonomy in exchange for capital? Or would you rather have ample funding while sacrificing some of your authority and direction? There’s no right answer here, so consider your goals carefully.
- Talk to peers and mentors. Finally, spend some time talking to entrepreneurial peers and mentors. Chances are, you can find people who have used a variety of different funding methods, and get their insights regarding the efficacy of those methods. They shouldn’t make your decision for you, but they can help you get closer to a personal conclusion.
The funding methods we list in this article are just a few of the options available to you. There’s no single approach that is “right” for every business, or even businesses within a specific industry; it all comes down to your capital needs, your goals, and your specific business model. Do your research and think carefully before settling on a final decision.
Interesting article: “What is business finance?“