The hardest part in starting a business is often coming up with the idea. The second hardest part can be raising the funds to get it started. You may have plenty of motivation, drive and enthusiasm, but ultimately you need some cold hard cash to get it up and running. Here’s a list of 10 key things to consider when raising funds for your business.
LET’S START WITH FUNDING SOURCES:
1. The easy part – your own funding. Depending on your bank balance, you may be able to fund the startup yourself. If not, most investors want you to have some “skin in the game” and put your money where your mouth is. Check how much you have in the bank, and how much you can realistically afford to invest.
2. Friends and family – approach friends and family if you think they may be interested in supporting your business. This can be as either a loan, or equity (share of ownership). One thing to especially consider with friends and family is that relationships can be at risk if the business doesn’t perform as expected. Formal legal agreements between yourself and friends and family may seem excessive at first, but will be worth the investment to protect each party and potentially save relationships if things sour.
3. Traditional funding sources – banks and financial institutions. These often won’t fund new start up businesses unless you have some form of security to provide (i.e. property). Sometimes that risk is worth taking, but be sure to get legal advice on contracts you are signing. And, remember that if you do secure a loan against your property you may end up losing it. Start ups are high risk, so it’s likely you’ll be charged a higher rate of interest than regular lending, especially from non-bank institutions. Make sure you factor this into your budgets.
4. Social / Crowdfunding – crowd funded platforms are increasingly popular and can be successful in raising funds. Crowdfunding can either be product / rewards based, or alternatively giving up a share of ownership (equity) in your business in return for funds. If you’ve got a strong social media network or an idea that fits well with backers, this could be an option for you. But, you’ll need to work it… word of mouth, media and PR contacts are all necessary to help raise the profile of your crowdfunding and ensure a successful campaign! Once you’ve built your brand, additional growth can be funded through these models too, especially if your customers are your biggest advocates.
5. Angel Investors – many countries have Angel Investment networks. These people are generally experienced business people that have money to invest, either individually or collectively. You’ll need to pitch your idea and, if successful, may find that your investors bring not only cash, but also a wealth of knowledge and expertise to your business.
IF YOU’RE LOOKING FOR INVESTORS, YOU’LL NEED TO CONSIDER WHAT THEY ARE LOOKING FOR:
6. The business plan – if you’re asking for external investment in your business, whether through loans, equity or rewards based support, you’re going to need a business plan that outlines your vision, your strategic goals and how you’re going to achieve these. Even if you’re not looking for investors, every business should have a business plan to help you achieve your dreams.
7. Financial budgets – investors are going to want to see numbers. You need to spend some time developing your cashflow budgets, profit and loss statements, and forecasting your sales, growth and expenses. If you really have no idea where to start, then talk with an accountant. Investors will want to see regular (minimum quarterly) financial statements to ensure their investment isn’t at risk, so it makes sense to set up some templates from day one.
OTHER IMPORTANT THINGS TO CONSIDER:
8. The right business structure – investing in expert legal and accounting advice is well worth the cost. Whether a partnership, limited liability company or sole trader structure, this advice can help protect your assets and provide peace of mind, as well as clear structure – especially if you’re funding your business through the help of investment from friends and family. An accountant will also help you consider tax implications of each structure, and financial reporting requirements.
9. Contingencies – let’s be honest… you’re going to have cost overruns; your budgets are only as good as your crystal ball. Make sure you build contingencies into your budgets – both cashflow and capital budgets – that fitout usually costs more than you expect and you can guarantee you will face unexpected expenses – especially if this is your first startup. Plan for the worst, and then celebrate when things turn out better than planned.
10. Finally, be prepared for much hard work, preparation and planning. But throughout it all, remember, it’s all part of achieving your dream.