Most people fantasise of breaking free from the shackles of their corporate lifestyle and taking control of their working destiny. We’ve all been there, after all, sat vacantly in our cubicle while dreaming of starting a lawnmowing business in Hawaii, before a mountain of analysis reports bring us crashing back to reality.
But does it need to be this way? Aside from needing a product to sell and a means with which to sell it, the whole process of setting up a business requires one material thing above all else: money. And the good news is that it’s not impossible to get.
Indeed, with some research and thorough preparation, securing investment for your enterprise is entirely viable. To prove our point, we’ve compiled a list of some of the more common options (as well as a few that are often overlooked).
So, if you want to be a little less Office Space and a little more Silicon Valley, then read on. This is how to finance your business.
1. Secured Bank Loans
Securing a bank-approved loan has always been the traditional starting point for most small businesses, with borrowers safe in the knowledge that their money is coming from an approved and credible source. In recent years, however, this process has become increasingly fraught with difficulty.
That doesn’t mean it’s impossible, though. For starters, it’s vitally important that you (as the CEO or founder of the business) have a good personal credit score, as no financial institution in their right mind is going to back someone who can’t keep up with their own personal payments. Likewise, you’re going to need to offer some form of collateral in order to give the bank an insurance policy. If you don’t hold property, vehicles or any other investment – either in your own name or the business’s – then you’re likely to be rejected.
If you’re already operating and turning over revenue, your cashflow statements better look good, too. Every business has issues from time to time, but if there’s never any money for the day-to-day machinations of running the company, then you’re not exactly well-placed to make loan repayments.
If you can negate these three common pitfalls and demonstrate to your bank manager that you’re the real deal financially, then there’s no reason why you shouldn’t be able to get the funding that you need.
2. Your 401k / Pension
If you’ve spent some time in the employment market and have started to amass some significant contributions to your 401k / pension pot, then you might consider putting these funds to more immediate use. Although the legal lines can get a little blurry, with the right guidance and advice it is entirely possible to finance your business using your retirement savings.
To cut a complex and lengthy legal process short, you will be required to set up a specific kind of company and adopt a certain type of retirement plan; you then roll your existing funds into this plan and exchange it all for the stock in your company. Sounds simple, right? (It’s also possible to combine other people’s pensions – such as family members or friends – into the money pool, so if it’s a joint venture, you can share the risk out between you.)
Of course, the most obvious downfall is that if your business goes pear-shaped, then your nest egg in later life has disappeared. Therefore, it’s not advised that you invest all of your funds. It’s also easy to run afoul of the taxman; there are numerous salary, operating and dividend regulations that must be strictly adhered to, so ensure that you invest some of that money in a good accountant.
Crowdfunding platforms such as Kickstarter and Indiegogo have financed everything from movie sequels to virtual reality platforms in recent years, so turning to the internet for help can be a potentially fruitful option. Your business will have to capture the imagination, though, with thousands of other prospective entrepreneurs vying for the same hard-earned cash.
If you prepare thoroughly and conduct a clever, well-promoted campaign, then you should see some reward for your efforts, but the most important thing is to bring something to the table that is new and exciting. You will also need to entice people, too, such as the promise of incremental rewards depending on the size of donation.
4. Angel Investors
Angel investors are the financial backers that you see on the likes of Shark Tank or Dragons’ Den, offering investment and expertise in return for a stake in the business. Of course, you don’t need to deliver a presentation on national television to gain access to angel investors, but the less visible process of securing their help is no less daunting.
The key – like on television – is to be thoroughly prepared. Angel investors are less interested in the product itself and more on the market research that you have conducted, the business plan you have written and the viability of your valuations and projections. They are also interested in you as a person and your commitment to your business.
Don’t try to lie or mislead, as your books will be thoroughly scrutinised before any capital is forthcoming, and you will likely end up with egg on your face. Conversely, don’t jump into bed with the first investor that throws a number at you, either. If your business proposal is solid enough, investment offers will arrive naturally; don’t just focus on the figures but consider your angel’s industry expertise and the kind of working relationship you will have, too.
5. Venture Capital / Private Equity
The main difference between angel investment and venture capital (VC) is that while the former involves working with an individual, the latter involves dealing with fully established businesses in their own right. Straight away, this puts an entirely different slant on your strategy for success.
The biggest hurdle is accountability. Angel investors are wealthy individuals who are motivated by their own interests, whereas VC firms have to justify their decisions to external investors and directors. This can work two ways, though: while some angels may be less willing to take risks with their own cash, VCs can sometimes be less miserly when it’s other people’s money involved.
There’s another benefit, too: VCs and equity houses can offer a lot more capital (although they’ll expect you to be at a more advanced stage in the startup process), and they also stick around a lot longer to see their investment through. If you have a truly exciting product (and a strong business development strategy to back it up), then pitching to VCs could be the most risk-averse way of getting the financing you need.
6. Grants and Financial Support
Depending on where you are based – and what industry your business is operating in – you could be entitled to a grant through an economic development programme. There are various types of government and privately supported funds that you could be eligible to receive.
The key is to do your research. For instance, the European Union hosts several funding programmes and offers support to businesses whose products or purpose aligns with their interests and policies (these grants can be accessed following public announcements, known as ‘calls for proposals’). Likewise, in the US, there are dozens of federal and state-backed options, particularly in areas where business growth is vital such as STEM enterprise and female-led initiatives.
If your company sits in a sector that is economically important, then search around to see what you are eligible for; you never know what money might be available.
7. Non-Bank Loans
As previously mentioned, having a small business loan application accepted by a retail bank can be a tricky task. Therefore, it might be pertinent to look elsewhere for the funding you need, and there are numerous private lenders that are willing to back businesses, both online and offline.
Each lender will have different criteria that must be met, but as a general rule of thumb, your business should have been legally operating for at least a year, with a minimum revenue (not profit) of around $50,000 to $200,000 per annum. They may also set minimum and maximum lump sum figures that you can apply to receive.
There are numerous advantages and disadvantages to this method, with the most obvious being the lack of security that a major high-street bank offers. Moreover, if your lender goes out of business, there’s no guarantee on who might buy your loan. Interest rates are also not as favourable as they once were, due to the banning of controversial ‘exit charges’. On the plus side, though, you will get a more personalised service, and those interest fees are still competitive compared to the banks.
8. Selling Your Assets
Much of this approach depends on how serious and willing you are to commit to your business – we don’t recommend you re-mortgage your house in order to finance your friendship bracelet business, for example. If you’re putting everything into your business, though, and it’s a viable and profitable full-time venture, then it might be worth considering looking at what you can sell.
For instance, selling your car in order to raise some capital is relatively risk-free (unless you really need your car) and can be a smart decision if you turn that money into profit. Again, we wouldn’t advise on doing this unless you were confident of a return, though. In fact, investing your personal assets into your business should really be a last resort, as the consequences of losing your house, for instance, don’t bear thinking about; be sensible, and ensure you know exactly what you are doing before you go down this route.
Alternatively, be creative. If you have a spare room in your home, consider renting it to a lodger or through Airbnb – you don’t necessarily have to ‘sell’ your assets in order to make them work for you.
9. Investing Your Salary
In the very early stages of your business venture, particularly when you have no money set aside, the worst thing you can do is quit your job. Startups don’t turn a profit overnight, so it’s prudent to keep that monthly paycheque coming in while you work on gradually building up your company and making sales.
Yet that paycheque can also represent your initial investment, too. You may need to look at making some spending sacrifices elsewhere, but if you can earmark a certain amount of your salary that goes towards paying your business costs, then it becomes a totally risk-free investment strategy.
Of course, at some point, you’re going to have to start scaling in order to grow. But it’s a vital way to prove to any future investors that you are capable of turning a profit, as well as being the financially safest way to get the ball rolling.
10. Getting a Side Gig
On a similar note, a second income can provide the initial startup funds that you need, especially if you’ve got no breathing space in your main paycheque or you’re unwilling to compromise on your current spending.
There are numerous well-known side gigs, such as driving for Uber or freelancing your existing skills and talents. As this method of working becomes increasingly popular, there are also a wealth of platforms on which to advertise your services. Of course, the extra hours mean that you will need to put your business development on the backburner, but as a means of getting some initial capital together, this is another totally risk-free option.
Of course, these are not the only ways to raise money for your business; there are several accounting and financial manoeuvres, such as ‘factoring’ that you can explore – or you could simply ask your friends and family to give you money! But as an entrepreneur, ensuring that you have the right means of funding is a vital part of the business journey. It’s no good making a million-dollar profit if you’ve agreed to give two-thirds of that away to an angel investor, just as it’s not productive to secure a $500,000 loan if you’re planning to walk away after three years.
Remember: be sensible, seek the advice of professionals where larger sums are involved and never – ever – agree to something until you fully understand the consequences first.
How did you secure funding for your business? Let us know in the comments below…