Ways to fund your business

When starting your business, usually the first thing that comes to mind is how are you going to pay for the initial costs to produce your product or service as well as any overhead. What many people don’t realize is that there are many different options that you have in regard to receiving funding for your new business. Many people usually believe that the only options that they have are to either try to fund it themselves or get a small business loan backed by the SBA. There are many more options and depending on your situation, these options may be a better fit for you. In this post, we well go through 4 in particular, listing what they are, what type of business would normally use that particular option, their financial situation, and the pros and cons of each option.

Option 1: Bootstrapping

The first option that we’re going to discuss is what’s known as bootstrapping. For those that are unfamiliar with the term, bootstrapping is using one’s personal savings or initial sales to fund the business. Usually, the businesses that go this route tend to have low overhead or have initial costs that are below the minimum requirements to receive a small business loan or an investor for their business. Examples of a successful business that has used bootstrapping include Apple, Dell, Facebook, Coca Cola, and Hewlett-Packard. When using bootstrapping to fund your business in the initial stages, there are a few pros and cons:

Pros:

• Because you’re using your own savings or initial sales to fund your business, you aren’t in debt to any investor or lending institution.
• When it comes time to finding additional funding, such as fining an investor or applying for a small business loan, you will have a head start compared to others and will improve your chances of finding an investor or getting approved for a small business loan

Cons:

• You are using your own personal savings and initial sales to fund the business, so if savings depletes or if initial sales decrease dramatically, this tends to spell trouble for new businesses who bootstrap, therefore making this option very high risk for small business owners.

Option 2: Loans

In regard to this option, when I mention loans I am referring to both private loans (money lent to us by family or friends) and institutional loans, such as small business loans. Usually, I find that this is the more popular option with new business owners, especially those that are either Baby Boomers or Gen-Xers. When getting a loan, there are some pros and cons:

Pros:

• you acquire a lot of cash in a short amount of time, especially if you are applying for a bank or business loan

Cons:

• When you apply for a loan, there are certain requirements that you have to meet first in order for you to be approved. With that being said, in order to get a loan from the bank or the SBDC, you do have to do a lot of work upfront in order to prove to yourself that you’re worthy of their time and money and are in no way a risky investment to lenders.
• In the case of a private loan, personally I don’t think it’s wise to borrow money from friends or family, especially if your business flops down the road (unless they insist on giving it to you, which in that case please introduce them to me).

Option 3: Angel Investor/ Venture Capitalist

I also like to call this option the “Shark Tank Option,” because that explains this option in a way that most American families understand. That’s because the Sharks are essentially venture capitalists or angel investors. Depending on where you live, you don’t have to go on some TV show in order to get an angel investor. There are some organizations and venture capital firms that will possibly meet with you and invest in your business. Usually, business that have been open for quite some time or entrepreneurs that have several years of running successful businesses may utilize this option because of the experience that venture capitalists look for. Also, a business that is growing exponentially and requires capital or expertise to not fall behind might utilize this option as well. With getting an investor come some upsides and downsides:

Pros:

• The upside with this option is that you get equity (whether it’s cash or equipment) to fund your business.

Cons:

• With this option though, you do have to give up a certain percentage of your equity to them as a result (similar to Shark Tank).
• Another downside to this is that, like i mentioned before when we were discussing loans, you also have to go a lot of homework upfront and prove to the investor that you have a great idea that will give them a high return in their investment.

Option 4: Social Capital (or Crowdfunding)

The last option that we’re going to discuss to fund your business is by obtaining social capital. Examples of Social Capital include setting up a page on websites such as Kickstarter or GoFundMe. This option usually attracts younger entrepreneurs or those that could not get any funding through the other options mentioned before (Or those that don’t do the research on the other options). I have found that not many entrepreneurs have gone this route when looking for funding, which gives me hope because I would only use this option as a last resort and if you’re in desperate need of funding for your business. I have seen some in the south Louisiana area go this route, and I’ll be honest, it didn’t turn out well for them. Which leads me to the pros and cons:

Pros:

• In my opinion, there is little to no upside to using this option, even though you are earning some funds.

Cons:

• In south Louisiana, these type of websites are viewed as an option for raising money to pay gigantic hospital bills for someone who’s been in an accident, raising money for vet bills for an abandoned animal, or to help pay for funeral costs for someone who suddenly passed away. These are more philanthropic.
• This option shows very little success for business owners. The reason being because when you start your kickstarter or GoFundMe page, you still have to get everyone you know to donate so that you can attract outside investors, so you’re basically better off in this case going to option 2 at this point. Even though I do not recommend doing this option, I did want to at least show you that this is an option, but should be a last resort if anything (and then again, I would reconsider your idea or opening your business if you got to this point anyway)

So What Option is Right for You?

When choosing a funding option, you want to choose the option that is the best fit for you and your business. Say that your business has low start-up costs and low costs of operation. In my opinion, if you don’t require a lot of funding right out of the gate, bootstrapping may be the option for you. Another example would be if you are a new business owner and your business requires any type of asset or equipment upfront, such as a warehouse to store your product or any expensive equipment to make your product. If you fall into this scenario, then maybe a business loan would be a good fit. In the case of getting an investor, if you are being held back from growing exponentially because of a need for additional inventory in order to keep up with incoming purchase orders or contracts, or if your company is rapidly growing and need advisory expertise, this option may be the best one for you. Finally, in the case of social capital, if you have a large pre-existing large database of people that you know will invest a couple of bucks into your new business, if you have a low startup costs, a low risk product and low expectations, if you have had prior success with products laugh, or if you are selling a product (not a service), then this option may be for you. When I say large pre-existing database of people, I’m talking about the same size database of a celebrity, like Oprah or Bill Gates. In order to see any type of return or your funding goal reached, it will take A WHOLE LOT OF PEOPLE.

 

So what option best fits you and your business?