Finance your business, you have an excellent idea and you feel passionate and excited to start a business. You have everything figured out and you have a well-planned business plan. You already know which product or services you are going to sell and you feel very confident about your value proposition offer. The next step is to find seed money to finance your business.
By this stage make sure that you already have your business plan and business canvas ready because these are two important documents that potential investors, government agencies, and financial institutions will require in other to finance your business.
It is always been a challenge for small businesses to get financing. Most banks are more likely to lend money only to businesses with an established operating history. If you are just starting up, especially an online business or if you find that traditional loan terms are too stringent, there are other options.
Here are a few ideas you may follow to find financing for your venture. These are not by any means of financial advice, you should meet with a finance expert to make sure your choice is well suited to your business venture.
Bootstrapping
To get started, many entrepreneurs use bootstrapping, which means financing your company by scraping together any personal funds you can find. This typically includes your savings account, credit cards, and any home equity lines you may have. When you approach other financing sources such as bankers, venture capitalists, or the government, they will want to know exactly how much of your own money you are putting into the business operation.
After all, if you don’t have enough faith in your business idea to risk your own money, why should anyone else risk theirs? A personal fund is a good way to finance your business.
This can be beneficial because it means you won’t have extensive loans and huge monthly payments that will hurt your cash flow, especially if you run into difficulties along the way. It is very important that you keep it balanced because the business may take some time before becoming profitable. you should make a wise investment when you are self-funding your business. If you want to scale up your business quickly you should consider having money from other sources as well.
Friends and Family
In this section, there are two ways you can get seed money from friends and family to finance your business. The first one is to form and register a partnership with two or several people. By forming this partnership following the clauses and agreement each partner will know at which percentage they will invest in the business and how the business revenue is going to be shared accordingly among the partners.
For example, if there are two partners and each one invests 50% of the seed money; the revenue will share at 50% as well. This method is good because you have other partners to take the risk with you.
Be aware that in a partnership setting each partner is liable for the business operation according to their investment percentage. The second way is to receive a loan free or without interest from your friends and family. While these individuals can be more forgiving than a bank if you can’t pay on time, your relationship with friends and family may become strained if you cannot eventually pay them back. They may also offer advice as well about how to run your business successfully.
Get a Microloan
What is a microloan? It is a program administrated most of the time by the chamber of commerce or microfinance institution. In the US this program is administered by the Small Business Administration (SBA). This program provides micro-loans to start-ups, and newly established, or growing small business endeavors. Most starting entrepreneurs who do not have a good credit history, collaterals, or other bank requirements, do not have the ability to secure a loan through a traditional bank.
The only option they have would be to apply for a microloan, a small business loan ranging from $500 to $35,000. Microloans are often so small that commercial banks aren’t bothered lending the funds.
To get a loan, you need to turn to a microlender Instead of a bank. Micro-landers are financial institutions or non-profit organizations that work differently than traditional banks. Microlenders offer smaller loan sizes, usually require less documentation than banks, and often apply more flexible underwriting criteria.
There are a few hundred microlenders throughout the world. It should be easy to find one close to your location and they often charge slightly lower interest rates for loans than a traditional credit line at commercial banks. It is specially designed to help those who might not find funding in the private sector, such as women, low-income, veteran, and minority entrepreneurs to get finance for their businesses.
Credit Cards
Funding your venture with a credit card could be one of the easier ways to access funds quickly, especially if you have several cards. But you need to be aware that the interest rates are high and falling behind on your payment, your credit score can get whacked. And also if your pay only the minimum each month, you could create a hole that will be very difficult to get through.
You will be paying off the card for a long period of time at a high cost. However, if you use it wisely and responsibly, a credit card can get you out of the occasional jam and even extend your accounts payable period to maintain your cash flow.
Crowdfunding
Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via a chamber of commerce association or the Internet. Crowdfunding could be a form of crowdsourcing and alternative finance. Websites like Kickstarter and IndieGoGo provide platforms to raise money from individuals, and small supporters across the web.
All you have to do is set up a campaign and name a target amount of money you want to raise. You need to create a reward as well for donors who pledge a certain amount of money. Kickstarter has funded roughly 1,000 projects, from rock albums to documentary films since its launch. But keep in mind, this isn’t about long-term funding.
Peer-to-peer Loan (P2P)
This could be a potential financial source for your venture. It is basically online networks such as Lending Club and Prosper that allow individuals to make unsecured loans to other individuals. Lending Club facilitates business loans of up to $100,000 at rates starting at 5.9 percent with one to five-year payback periods.
P2P loans aren’t always better than loans from traditional banks and credit unions, but they are typically competitive. It is easier to get and sometimes the interest rate is low, the application process is typically straightforward, and you can often find out relatively quickly whether or not your loan is likely to get funded.
Traditional Bank Loan
While a traditional bank loan could be hard to get but it could be one of the more reliable financing sources to finance your business. Banks generally charge fees along with interest and require collaterals. Loans are usually one to five years with interest rates ranging from six to nine percent. Some banks may charge you more but If you can show that you’ve started gaining traction and making money (and that a loan would help you earn even more), you may be able to qualify for a traditional bank loan with a lower interest rate.
Home Equity Loan
Consider this only if you are a homeowner with more than 50 percent of your home’s value as equity (the loan outstanding is less than half the market value of the house). If it is and you have a good credit rating, you could get a loan at an attractive interest rate with your home as collateral.
Venture Capital
A venture capitalist is an investor who either provides capital to startups or supports small companies that wish to expand but do not have access to equities markets. Venture capitalists are quite picky about their equity investments. One million dollars is usually the minimum investment and the fees can be quite high.
A representative of the VC firm will likely want a seat on your board of directors and will have input into the direction of the company. You need to be aware that venture capital firms want higher return rates than other investments such as the stock market to provide, they typically invest in promising startups or young businesses that have a high potential for growth but are also high risk.
Freelancing
Do you have some special skills? Are you good at something? Do you know that there are a lot of people desperate and ready to pay for your skills in order to get their projects done? A lot of people are making full-time income through freelancing and use the money to finance their dreams. There are platforms such as Fiverr and Upwork that people can use to make money as freelancers. These freelance platforms are also good sources to find skilled people to outsource projects for their own projects.
conclusion
There are several ways to finance a business, including self-funding, crowdfunding, venture capital, bank loans, government grants, and strategic partnerships. Self-funding involves using your own savings or assets to finance your business, while crowdfunding involves raising small amounts of money from a large number of people. Angel investors are individuals who invest their own money in businesses in exchange for ownership equity, while venture capital involves raising large amounts of money from specialized investors.
Bank loans allow businesses to borrow money to finance their operations, while government grants can provide funding for certain types of businesses. Incubators and accelerators provide support and resources to help businesses succeed, often in exchange for a small equity stake. Strategic partnerships involve partnering with other companies or organizations to secure funding in exchange for a share of the profits or ownership equity. Please sign up for our newsletter now.
