I’m a firm believer that everyone has a business idea in them. Quite often, a great business idea is staring us right in the face, but we just don’t see it – and part of that blindness is thinking that every business needs tens of thousands of pounds to get it off the ground. Wrong!
You really don’t need so much money all the time – many businesses only need a little time and attention and minimal financial investment (less than £100) to get it off the ground. Quite often the huge investments that we see on programmes like Dragon’s Den are needed for big marketing and promotion campaigns, and perhaps to buy a huge bulk of the product to supply demand and grow the business faster.
If you’re looking for a way to fund your business, there are a variety of ways to raise that finance and the best for you depends totally on your product, your market, your business’s financial requirements and most importantly, your personal and financial situation.
Remember that all methods have pros and cons and some (or most) may not work for your specific situation. No matter what financing method you choose make sure you take time to really investigate the ups and downs before you sign on the dotted line.
So with that in mind, here are a few of the most common ways to finance a new business:
1. Savings and investments
The first source you should consider tapping is your own savings and investments. Financing your business yourself means that you’re not responsible to others should the business fail. The bad thing is that if things do go wrong, it will be your money that goes down the drain, but if you’re not willing to risk your own capital you certainly shouldn’t be willing to risk anyone else’s.
2. Friends and family
After tapping their own savings and investments, many entrepreneurs turn to friends and family for help. This works well for some, but it can cause problems if you choose the wrong people, and if you struggle to either get the business of the ground, or pay them back. Nothing causes tension in a family like lending money that is never paid back. And notice I say “lending money” rather than investing money. Venture capitalists invest money. Your relatives lend you money. They will expect the money back someday even if they say they won’t. Remember, when a loved one invests in your business they are emotionally investing in you.
3. Credit cards
If you decide to finance your business on plastic keep in mind that you will be paying extremely high interest rates on the money you’ve borrowed and unless your business is a resounding success, you will be paying for that money for many years to come.
4. Re-mortgage your home
Bank loans are next to impossible to get if you don’t have collateral and a track record of business success, which is why many entrepreneurs use the equity in their homes to finance their business after being turned down for a bank loan. While this makes more sense than building a business on a deck of credit cards, the financial risks are no less abundant.
You must pay this money back whether your business succeeds or not, but it is a good source of low interest money to get you started and the interest may be tax deductible (check with your accountant to make sure).
5. Angel investors
An angel investor is typically a wealthy individual who invests star business for a share of the ownership. Angel investors are usually the first formal investors in a business and provide the seed money to get the business up and running.
Some angel investors will give you the money and leave you alone to run your business, while others consider their investment a license to “help you” manage and make decisions in your business. If you do accept angel money make sure the terms are clearly defined on both sides to avoid problems and. Is understandings further down the line. Angel money always comes with strings. Make sure you know whether those strings come in the form of a bow or a noose around your neck before you sign anything.
6. Venture capitalists
Venture capitalists are to angel investors as pit bulls are to poodles. That’s not to say all venture capitalists are big, bad dogs, but they do have powerful jaws that can chew up your business and spit it out if things don’t go their way.
Venture capitalist money doesn’t come with strings – it comes with chains and locks and lots of legal documents.
If your business gets to the level that venture capitalist money becomes a viable option, don’t jump at the first bone a venture capitalist dangles before your eyes. If one venture capitalist likes your idea, others will, too. Present to multiple VC and carefully consider each offer before you accept the check.
Just remember, no matter how you finance your business, use the money wisely. Have a very clear plan of how the money will be used and how it will be paid back.
And remember this, the more you can shoestring the business, but more of the business you will own in the end.