There are a wide variety of ways to fund your business or idea, such as bootstrapping including family, friends to banks, crowfunding, venture capitalist and angel investors.
Any individual thinking of starting his or her own business is going to need the funds to get off the ground. Procuring funds can be difficult, as financial institutions and investors want to know where their money is going to be put to use and whether the business they invest in has potential.
Having a business plan/Pitch Deck is often vital to show potential investors to increase the chances of success. First step is to work out how much money your business needs. Both over and underestimating the amount of capital needed to fund your business can have serious negative consequences.
Why not underestimate?
Underestimating what you need can cause problems ranging from having to go through the whole time consuming fund raising process again, which often undermines your credibility as an entrepreneur with the investors and can cause a significant dilution in your ownership as the founder(s) to having to shut down the company because funds have run dry.
Why not just obtain more?
Obtaining more than enough capital may seem like a blessing at first, but it can breed a lax attitude toward expense control. “If you have it, spend it,” is not an advisable motto for a new startup.
The more money you raise can have other potential problems, the larger the round, the higher the price, the harder the next hurdle; generally, because investors often seek to make a minimum of 10x on their investment, and when investing as an early-stage investor are often expecting much higher multiples.
Where equity is involved
If the investment takes the form of equity, raising too much or too little money means that either the founder’s share of the business is reduced more than was necessary which violates one of the maxims of entrepreneurship: hold on to equity or your the startup won't have enough for what they need to fulfil it's potential.
The best advice to help minimise these potential issues is to do a cash flow projection, or cash budget, which would include:
- Forecasts for sales and costs (on-going costs including rent, staff, stock etc.).
- Your projected cash position each month (based on the above).
- One-off costs and outlay for things like equipment (computers, tools, furniture etc.).
The next step is to then add 10%, 20% or even 50% to this amount, for “contingencies.” These contingencies are all the things that can go wrong in a start-up venture, all the unfavourable events that can negatively affect results.
What is Contingency Planning?
Contingency planning is a skill that does not come easily to all entrepreneurs–even those with a finance background. How do you get the cockeyed optimist (what you absolutely must be to even conceive of the idea of the starting a company), who expects the best, to plan for the worst?To stimulate contingency planning, it helps to look at the reasons why entrepreneurs so consistently run out of money; among these are:
While the financing sources comprise diverse options, it is useful to look at each of these and know what is involved and what investors or lenders want to see when they invest or loan money in your startup business.
Every penny counts when it comes to starting a business and so, it makes sense to pay while you earn to manage your financial and other resources better.Bootstrapping at every stage can make it much easier to raise funds in the future if needed.
Here are some ideas to save costs:Start saving any excess money
Cut down on take-aways, coffee shop coffees
Defer capital purchases
Co-working with others, find a shared office
Use existing equipment like computers, tablets etc.
Sharing office services
Eliminating high expenses by using effective internet services for design, accounting, website design, marketing and teleconferencing
Look at your finances regularly
The Buildily Startup Package helps entrepreneurs save thousands on the tools and services they need to get started
Bootstrapping also includes getting Friends and family to help as they can often be in a position to help and you may be able to negotiate more favourable terms compared to an organisation but like with any form of outside lending it’s important to agree on the terms of the investment up front as a financial transaction gone sour can result in the breakdown of the relationship especially if terms had not previously been agreed.
It’s much better to make sure everyone knows where they stand whatever happens to the business
2. Small Business Lenders
When you seek money for your business, lenders will be interested to know about the history of your experience, your business plan and if you have any related business. Lenders what to know whether you have a track record of good management and good performance in your business or similar business.
Lenders will be keen to know whether you have the ability to repay a loan and will look at your present cash-flow (if you how some) or at the very minimum your projected cashflow to see whether it is sufficient to enable you to meet your current obligations as well as to take on extra debt.
Banks, credit unions, and finance companies are the main source of loans to businesses. Although loans for small businesses are hard to come by these days they do exist make sure you ask your bank about the Enterprise Finance Guarantee (EFG) scheme (UK) (or equivalent in your home country, city or state), which the government introduced to help small business secure finance.
Buildily has partnered with FundingOptions to help you to find the right finance solutions to help invest and grow your business. It’s fast, simple, and no-obligation.
SBA loans, and microloans from nonprofits (U.S)
The U.S. Small Business Administration has a microloan program that offers up to $50,000 for small businesses and some not-for-profit child care centers. The average SBA microloan is about $13,000. Here’s a list of providers.
The downside of the microloan is the “micro” part: Funding may not be sufficient for all borrowers.
The SBA’s flagship 7(a) loan program also offers financing that borrowers can use to start businesses. But 7(a) SBA loans are tough to get. They typically go to established businesses that can provide collateral — a physical asset, such as real estate or equipment, that the lender can sell if you default. The qualifications are strict, and even if you qualify, the process can take several months.
Microlenders and nonprofit lenders can be a less difficult route, especially if you have shaky finances. Many focus on minority or traditionally disadvantaged small-business owners, as well as small businesses in communities that are struggling economically.
Generally, you’ll get solid loan terms from these lenders, making it possible for you to grow your business and establish better credit. That can help you qualify for other types of financing down the road.
3. Grants and bursaries
There are thousands of different types of business grants available to startup businesses. Many entrepreneurs often assume that these are just government based grants (The UK government has set up a Business Finance Support Finder, in Northern Ireland (Invest NI), Wales (Business Wales), Scotland (Scottish Enterprise) and the Local Enterprise Partnerships in England. Something similar may be available in your home country).
When it comes to grants there are also many initiatives attached to universities, some may be available if you are a current student or recent graduate or perhaps run a charity or private collective.
The focus of these grants are often for early-stage businesses or for research purposes, however, they can vary greatly. There can be a heavy bureaucratic toll in applying, selection procedures can be competitive, so assess the rewards on offer against the focus and time required to apply.
You can find over hundred grants which have are awarded by the UK government.
4. Startup Loan - Personal Loan for Business Purposes
A great alternative for individuals looking to fund their startup is by getting a Loan catered for startups. In the UK A Start Up Loan is a government-backed personal loan available to individuals looking to start or grow a business. These loans are provided through the Start Up Loans Company which is a subsidiary of the British Business Bank.
In addition to finance, successful applicants receive 12-months of free mentoring and exclusive business offers to help them succeed.
The loan is unsecured, so there’s no need to put forward any assets or guarantors to support an application.
All owners or partners in a business can individually apply for up to £25,000 each, with a maximum of £100,000 available per business.
Other countries have similar government-backed loans available contact your local authority and find out what is available.
Sign up to Startup Loans
5. Venture Capitalists
These are typically firms that are seeking investment opportunities in companies with a high-profit potential. Usually, when you take money from a Venture Capitalist firm it means that you have to give up some ownership and control to the investors. If you are thinking of going in this direction, then it is imperative to investigate the VC firm and make sure that it has good references.
Buildily works with many leading VCs, who look for businesses wanting to build high growth companies.
If you have a great idea which is trying to solve a big world problem get in contact
Checkout our VC directory of 500+ UK, Europe and Non-Europe VC firms investing in Startups
6. Angel Investors
These are individual investors who are looking for good opportunities in a wide variety of businesses. You don’t have to be a high-tech company to attract these funds. Angels have smaller sums to invest than venture capitalists. There are a good number of angel investors in the UK, U.S. and Canada, with at over 170 investment groups or angel networks spread around these countries.
To help you find your business angel we’ve teamed up with the Angel Investment Network to help you get funded.
Crowdfunding is changing the way businesses raise money, through providing entrepreneurs an alternative source of finance for their businesses by bringing together a large number of people to financially back a particular business via an online platform.
There are many types of crowdfunding models, including reward-based, donation-based, micro-lending, peer-to-peer, peer-to-business, and equity.
Want help to understand Crowdfunding and how to create a successful campaign?
Register for our Crowdfunding course
Ready to Equity Crowdfund Visit our Partners Republic