Building a business from scratch requires an excellent idea that has the potential to sell. But more than that, it requires capital. No matter how cutting-edge your product is, if you have no means to finance your entrepreneurial goals, your business won’t fly.
There’ll be instant expenses to shell out for. For one thing, you need money to design or create your product. You must also purchase equipment. And if you’re operating from a brick-and-mortar location, that’ll require significant investment, too. These are just a few business costs that will eat into your initial capital.
Unfortunately, not everyone has readily available funds to finance a business out of pocket. For many, the search for financing will be integral to the whole start-up process.
If you have a clever business idea but lack resources, you’ve come to the right place. Here, we’ll discuss the financing options available at your disposal.
Debt Financing
This method is arguably the most popular business financing option—and that’s for an understandable reason. For one thing, it’s a no-strings-attached agreement. You can run your business however you want, without the loan provider’s input or pressure. Your only obligation is to pay up, akin to how you manage a mortgage or auto loan.
With debt financing, you can either go traditional or non-traditional. With the former, you can tap banking institutions. They can provide you with an array of loan products, such as a commercial loan with a corresponding interest rate. You can use the loan proceeds for equipment or location purchase, payroll, and other operating costs.
As for the latter, online lenders belong to this category. They are less stringent regarding requirements and offer a higher loan approval rate. You can also go to microlenders or individual lenders if you’re in need of a smaller amount.
Alternatively, you can apply for a personal rather than a business loan and funnel the funds you get into your entrepreneurial project. This is ideal for borrowers with an excellent credit history.
Small Business Grants
Small business grants come from various sources, including governments, nonprofits, and corporations. The goal behind these financial aids is to help launch or grow small and mid-size enterprises (SMEs). Some small business grants get even more specific than that, focusing on underrepresented demographics, such as women and minorities.
Government business grants are available at the local, state, and federal levels. Noteworthy options include the following:
- U.S. Department of Commerce Minority Business Development Agency (MBDA)
- Farmers Market Promotion Program
- Small Business Innovation Research Program (SBIR)
Meanwhile, nonprofits and corporations offer general business grants, such as the following:
- Business Warrior
- GoFundMe Small Business Relief Fund
- The U.S. Chamber of Commerce’s annual Dream Big Awards
Available diversity business grants include the following:
- Amazon’s Black Business Accelerator program (for black entrepreneurs)
- Amber Grant Foundation (for women entrepreneurs)
- Black Founder Startup Grant (for black, women, and non-binary entrepreneurs)
As for industry-specific grants, there’s the Etsy Emergency Relief Fund for Etsy sellers and the Jobber Grants program for those in the home service industry.
These grants are highly selective. To be eligible, you need to develop a business plan that adequately captures the viability of your idea.
Equity Financing
Equity financing relies on angel investors or venture capitalists. The former comes in the guise of wealthy individuals looking to expand their assets by putting money into up-and-coming businesses with proven potential. Meanwhile, venture capitalists are typically firms with a team of financial advisors, accountants, and lawyers running them.
If you need a large sum, a venture capitalist is right up your alley, as it offers investments of at least $3 million. Meanwhile, for smaller funding, for, let’s say, an app you want to develop, it’s best to go to an angel investor. It’s easier to close a deal with an angel investor than a venture capitalist, given the latter involves significant amounts of money.
Venture capitalists and angel investors share something in common despite their obvious differences. They both seek equity in your business. That equity can be as high as 50% of your company’s shares.
As for the upside of this financial partnership, there’s the fact that it’s technically not a debt you need to pay regularly and reflect on your business’s financial statement. Plus, these investors recognize that it takes time to grow a business; hence, they’re willing to wait for your project to reach its full potential. Those considerations can lift significant pressure off your shoulders.
Crowdfunding
Crowdfunding relies on the internet to solicit funds from many people. If you have a business idea and you’re confident that it has what it takes to command the support of a specific market, you can sign up with a crowdfunding site such as Kickstarter.com. There is a wide range of business projects that crowdfunding organizations may finance. However, it’s not for everyone.
For example, if you require money to take care of operating costs, such as paying remote workers, you’re better off with debt financing. Meanwhile, if you have a novel idea for a gaming app and need resources to kick off the project’s creation, you’ll be more than welcomed by crowdfunding site aficionados.
While crowdfunding seems like a convenient way to raise money, it has challenges, too. For starters, you need an interesting idea to encourage people to link their credit cards to your project.
That means you have to be a good storyteller. And it would help if you had a pulse of what your target audience expects. After all, you will have to offer them something in return. Those rewards may range from a privileged chance to try the gaming app prototype to free and limited merchandise.
Mezzanine Capital
This financing option combines the best of debt and equity funding. A mezzanine capital provider has the prerogative to convert an outstanding loan to business equity. The reason for this shift normally involves the borrower’s failure to repay in full or on time.
Through mezzanine capital, lenders are able to adjust their priorities based on the growth prospects of their borrowers’ businesses. For example, if yours took off faster than expected, a lender might realize they’ll earn more from being an investor in your business rather than a loan provider.
However, how that will be made plausible will depend on the fine print of the agreement you signed. Keep in mind that there are no hard and fast rules to mezzanine capital agreements. So, it’s in your best interest to peruse the contract before putting your signature above the dotted line.
As for advantages, mezzanine capital appears as equity on your business’s balance sheet. That makes your financial statement more appealing should you reach out to more investors. Additionally, it’s a more convenient option for a business with fewer than three years of operation but has already shown signs of growth.
Savings, Friends, Family, and Other Sources
If you have savings, you can funnel those funds into your dream business. The upside is that you’re not indebted to any individual or organization. You won’t be slapped with exorbitant interest fees, too.
If spending your savings is out of the question, you can reach out to benevolent friends and family and ask for what finance pundits call “love money” or “patient capital. This is where a rich relative may be able to lend a hand via a loan. Perhaps you have a friend from college who is a retired Silicon Valley millionaire and may be willing to help you get your business off the ground.
The advantage of borrowing from someone you have a personal relationship with is that you can agree on a loan or investment term where you can be sure that both parties are not getting shortchanged. The downside is you might compromise said relationship should your business venture fail.
Lastly, there’s the reappropriation of available funds. Have you amassed enough retirement nest egg? Why not consider tapping that for your business venture? Of course, this is a somewhat risky way to finance your project, but if all else fails, this might be worth looking into.
Wrapping It Up
When it comes to business financing, prioritization is critical. Sure, you have many different options, but just because you’re able to get as much as you’d ask for doesn’t mean you should spend as big as you can.
Remember that you’re still testing the waters. If you go all out from the get-go and come up with significant losses, it’ll be challenging to bounce back. That’s most true, given the interest rates usually linked to these financing options.
Rule of thumb: match your clever business idea with an equally brilliant expense strategy. You cannot get any more strategic than knowing which expenses to spend for now and which ones to schedule later when it’s more financially viable.
Lastly, make sure to fully understand and completely honor the stipulations in the financing agreement you sign. The former will allow you peace of mind. The latter will ensure that should you need further financing from the same sources, you won’t have difficulty procuring them.
About the Author
| Lou Zandrian Lobrin
Lou Zandrian Lobrin is the Marketing & Communications Manager of AsiaLink Finance Corporation, one of the Philippines’ fastest-growing finance companies with 94 branches nationwide. He enjoys traveling, cultural immersion, and meeting new people outside work.https://www.pexels.com/photo/a-woman-in-plaid-blazer-using-her-laptop-6693661/ |
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