Do you have a great idea for a business? If you’re tired of working for someone else and think you have what it takes to be an entrepreneur, why not give it a try? Owning a business is a rewarding experience if you buy or start a company that turns a profit.
However, more than 95-percent of all businesses fail within the first five years. In a survey of failed business owners, a lack of funding was the number-one reason for the company closing its doors. Finding the funding you need for working capital and financing machinery is challenging for many new business owners.
While it may seem like there is no money around for your business, the opposite is true. There is an abundance of money washing around the economy. All you have to do to get some is learn how to tap into the money flows.
We put together this guide of 8 ways you can raise funding for your company.
1. Your Bank
When entrepreneurs start their journey to acquire finance for their company, it usually begins with a visit to the bank. You spent the last two decades as a loyal customer, you have an excellent credit record, and you never miss a payment on your personal loans. So, why aren’t the banks loaning you any money?
Banks are the worst source of funding for your business venture. Banks only concern is protecting their capital. Most banks rely on your credit score when facilitating a loan. If you have anything less than excellent credit, you can expect them to deny you any form of finance.
If you do manage to secure a loan from the bank to start your business, it often comes with a high APR. APR is the interest rate applied to your outstanding loan balance. Typical APRs for business loans from banks may vary between 12 and 25-percent, depending on the bank’s risk assessment of your business plan.
Paying this APR is outrageous, and you can receive better rates from many other lenders that gear their business toward funding companies. Banks do not like to engage in the business sector; they prefer to issue private personal loans to individuals instead. Therefore, don’t feel outraged if the bank denies your loan application.
2. SBA – Small Business Association
In 1953, Congress created the Small Business Association. The idea of the organization was to help small businesses in the Americas get off the ground and reach a profitable status. The SBA recognizes small business as the backbone of the American economy, and they do everything they can to assist small business owners in achieving their company goals.
The SBA does not lend directly to business owners. Instead, they offer guarantees on finance deals offered by other institutions. While the media is relentlessly pushing the idea of a looming recession, data from the SBA shows a record expansion of new businesses applying for funding in 2019.
The SBA has a variety of financial vehicles available for business owners. The 7(a) loan program is the most common used for funding a new company. With this loan, you have access to funding for deals up to $5-million, and data shows that the average loan size is $337,730.
The SBA may not guarantee your loan in its entirety. Regulations stipulate that for loans of amounts up to $150,000, the SBA guarantees only 85-percent of the loan amount. Loans above $150,000 only receive a 75-percent guarantee on the funding.
It’s important to note that the SBA will not deal with you if you have a weak FICO credit score. The program is also not available to business owners that want to refinance their company’s debt. You also can’t use the 7(a) loan to pay back taxes or repay equity loans in the company.
If you do qualify for an SBA 7(a) loan, then it takes quite a significant amount of pressure off of your business. The US government backs these financing deals. If you default on the loan, or the company goes under, then you have no financial liability to pay back the loan.
You can use the SBA website’s “Lender Match” to find a loan provider for your business.
3. Friends and Family
If the bank and the SBA turn you down on your business plan, then you still have other options. One of the most popular alternatives to commercial financing is asking your friends or family for the money. Why make other investors rich if you can make money for those that are close to you?
Before you start modifying your business plan to pitch your friends and family, there’s something important you need to know. Many friendships end and families fall apart due to money issues. IF you take the funding from your friends and family, then you better be sure that you have a water-tight business plan, and your company makes money.
Trying to tell your family that you blew their life savings on a startup will be the hardest thing you ever do in life. When a financial loss hits those you love, it’s that much more painful. If you lose the investment, regardless of whether it was your fault, you can expect your friends to turn their back on you.
Read: Prosper Loans Review, a Peer to Peer Loan platform.
4. Angel Investors and Venture Capital
If you’re planning a large business venture or a tech startup, then you are going to need plenty of money. Angel investors or venture capitalists are a fantastic option to get the funding your company needs. Typically, angels and VCs won’t fund deals that are less than a million dollars in value, and you might even struggle to get them to support anything under $5-million.
Tech companies rely on VCs for multiple rounds of funding. In most cases, VCs will ask for a percentage of your company as collateral in the deal. As you reach specified milestones with repaying your debt, the VC returns the equity to the original shareholders. However, one thing about
VCs that does not sit well with business owners is the equity involved with the funding transaction.
If you receive funding from a VC, you can expect them to ask for a controlling stake in the company. Giving away 51-percent of your business to a financier is probably the last thing you want. However, the VC will eventually return the controlling stake to you, after they are sure you have navigated out of the startup phase of your business plan.
Crowdfunding models are an invention of the internet economy. Over the last 10-years, we’ve seen companies like Kickstarter fund thousands of business ideas. Crowdfunding models involve you posting your business plan on a forum. Registered users then get the opportunity to dissect your business plan and make a decision if they want to invest in your company.
If you visit a bank or lender for a loan, then they pay you the full amount after approval, and you only have one creditor or investor in the business. However, with crowdfunding, you get small investments from hundreds of people. When you post your business plan, you have to enter a funding target.
Once your account achieves enough interest from investors, and it reaches the funding goal. The platform then releases the money to your nominated bank account, and you can get started with building your business. If you don’t reach the funding goal, the platform returns the pledged money to the investors.
It’s important to note that this is not free money. You’ll have to pay back the funding plus a return to every investor that puts money into your venture.
6. Your Boss
If you’re planning on starting a company that’s in the same sector as your day job, then approach your boss for funding. Your boss has decades of experience in the market, and with running a company.
Most people shudder at the thought of presenting their business idea to their boss. However, you might find it surprising to learn that many companies invest in employees that branch out to start a company in the same sector.
Your boss may see a collaboration deal with your business idea that could boost profits for both of you. Can you imagine if your boss becomes your partner?
We get it, you’re young, and you have the world at your feet. Your new business idea is the best thing since sliced bread, and you need funding now. If you are getting your feet wet in the world of business, then it’s a prudent strategy to find some help.
As a new business owner, you may have a great idea, but do you understand the nuances of cash flow or how to read a balance sheet? If you’re a green entrepreneur, then your lack of business skills may end up costing your company its bottom line.
Therefore, it’s a wise idea to enlist with an incubator. Incubators are organizations founded by business owners and companies that want to find the next Amazon. The organizations realize that brand new entrepreneurs need help managing their affairs.
If an incubator thinks you have a great business idea, they can do a lot to help your company get off the ground. Incubators offer mentorship and guidance that enables you to avoid the pitfalls of business ownership. Incubators also have plenty of connections to entities that will fund your business if the incubator is on board.
8. Federal Grants
If you plan on starting a company in the tech, science, or health sector, then you can apply for a government grant to get the funding you need. Government is aggressively funding businesses that contribute to research and development programs or scientific initiatives.
If your company deals with issues such as climate or environmental initiatives, then a federal grant program can help to cover some of your companies overhead. It’s rare for the government to award you a grant directly. Instead, they rely on local state authorities to deal with distributing federal grants.
Some of the federal grant programs available include;
- Small Business Technology Transfer Program – This program requires applicants to work with research institutions. There are currently five federal agencies that collaborate in the program, with grants starting at $150,000, reaching a limit of $1-million.
- Small Business Innovation Research Program – If your company specializes in research and development with a commercial prospect, then the SBIR is an excellent option for a grant application. Eleven government agencies participate in this initiative, and each of them has regulatory guidelines for funding small businesses. If you make a successful application, you can receive a grant from $150,000 to $1-million.
The Final Thought: Should you use Your Savings?
If you speak to successful business owners about funding, and you’ll notice a pattern start to emerge. Most entrepreneurs that taste success will tell you the golden rule with founding a startup or buying an existing business – Never use your money.
The most influential business leaders all recommend using other people’s money when sourcing your funding. Inexperienced business owners may use the equity in their mortgage or cash in their IRAs to fund their company – this is a tragic mistake.
As a business owner, your company is prone to the risk of financial loss or setbacks. If you use your wealth to start a company, what happens if things don’t go the way you plan? You’ll end up on the streets with your family, and there is no coming back.
By preserving your capital, and using other people’s money to fund your company, you mitigate any personal financial risk. So, the next time you have the urge to dip into your savings for a business idea – think again.
This article gives you plenty of options to secure funding without using your money. If you can’t find anyone willing to finance your business, it might be due to your business plan.
No investor wants to tie up their capital in a failing business idea. Some entrepreneurs will find they are struggling to acquire funding after going through every option on this list. In this case, you might not need funding – you need a new business idea.