If you have decided to take the leap and start a small business, the first obstacle you are likely to face is that of financing. Without any capital, it is nearly impossible to get your new business up and running. Yet without any income, your business is unable to generate money for itself. What is a new business owner to do?
Unless you have a lot of personal savings or are independently wealthy, you will probably need to raise some capital from outside sources. Here are a few options for raising money to start a new small business.
1. Friends and Family Loans
Often, friends and family will be willing to loan or donate money to your business to help you succeed. They can also be the fastest and most accessible source of financing for a new fledgling business.
However, be extremely careful and respectful when asking friends and family for money. It is incredibly easy to damage life-long relationships by making mistakes here. Four out of five businesses fail within the first five years, and money from friends and family may need to be repaid in full or with interest to preserve those relationships.
If your business struggles during its founding years, you may be forced to choose between repaying your family or keeping the business afloat. This circumstance can leave you in an uncomfortable position. It is essential to communicate with anyone you borrow money from directly and thoroughly to ensure that all expectations are realistic, and that they know what they are getting themselves into. One suggestion is to consider any money borrowed from friends or family to be a short-term high-interest loan that must be repaid as quickly as possible once the business is generating revenue. It can also be beneficial to have these terms in writing before accepting the loan, just as they would be when borrowing from anyone else.
2. Product Pre-Sales Can Raise Capital
If your business is based on selling a single product, you may be able to pre-sell it to customers as a way to raise the capital needed to produce and deliver the products. This method eliminates the risk of having produced unsold inventory and then having to warehouse those products. It ensures that every product has a customer waiting. It also encourages you to be fast and efficient with your production, because customers are eagerly awaiting delivery, often by a specific shipment deadline.
This method can result in a lot of pressure to deliver your products promptly. The expectation can be a good thing, but it also could result in compromises that shortchange customers by providing an inferior product. If anything goes wrong during production, you will be accountable to your customers for those delays and owe them an explanation. Impatient customers could get frustrated and demand refunds or leave negative reviews online, which could damage your company’s reputation.
Pre-sales can work very well if you are well organized and have any production issues sorted out ahead of time. It is vital to understand the pros and cons before choosing to go this route.
3. Crowdfunding Websites
Crowdfunding sites are similar to product pre-sales but provide a lot more infrastructure and tools to help you succeed. They also allow you to pre-sell more than one product, or combinations of products easily to large numbers of people. Recently, crowdfunding has become a popular way to raise money for new businesses that produce one or a few products. If you are an inventor, this could be a good option.
Popular crowdfunding sites include Kickstarter, Indiegogo, Fundly, and Fundable. These services all come with their own benefits and features, so it is essential to do your research and see which site is the best fit for your needs.
4. Take Out A Personal Loan
Financing any new business is a risky endeavor, and many lenders may be unwilling to lend you money because of the inherent risk. However, if you have considerable savings or own your home, you may be able to use either of those as collateral to take out a credit line to fund your business. Keep in mind that there are serious risks to be considered when going this route. If your company struggles to generate adequate revenue to repay the debt, you could end up losing a lot more than just your business.
Evaluate your options carefully and assess the risks before putting anything too vital on the line to get a personal loan. Also, it is essential to discuss these options and risks with any other stakeholders, including family, who may be adversely affected should you fail to repay the loan on time.
5. Alternative Lending Sources
Alternative lenders may require you to do a little more research before taking out a loan, as you want to be sure that any company you borrow from is a legitimate organization you can trust. These lenders fall across a spectrum of different categories outside of the usual banks and financial institutions. Some of these include Prosper, PayPal, Can Capital, OnDeck, and Kabbage.
Whichever funding source you choose to go with, always do your due diligence and verify that any terms and risks suit your needs and preferences before agreeing to anything. Make sure that your business is structured correctly, incorporated, and has adequate documentation and stable finances before attempting to secure financing from many of these sources. Lenders are taking a risk on you when they invest in a small business, so the more you can do to lessen their doubts and assure them of your ability to repay them, the better.
There are many different methods of securing funding for small businesses, but this shortlist of five simple options can help if you are beginning the journey of funding a new small business.
If you have any tips for fellow small business owners, feel free to share them in the comments below!