It doesn’t matter how amazing your idea is if you don’t have any capital to fund it. There are lots of avenues to explore once you decide you want to get your fledgling business off the ground, but before you start applying for business loans, think about what your goals are and consider each funding option accordingly.
Friends and Family
Your first port of call should always be friends and family. If your business idea is sound and you have a rock-solid business plan, it shouldn’t be that difficult to persuade those who care about you to invest if they have the funds. Raising start-up capital from this source offers many advantages, not least the fact that you may be able to secure it on an interest free basis with flexible repayments. However, do make sure you draw up a proper agreement, so as to avoid any misunderstandings at a later date.
Small Business Loan
Banks will lend money to new start-ups, but don’t expect the application process to be easy. Banks were badly burned in the global economic recession and are now much more risk averse. Your business plan will need to be thorough and you should be prepared to explain every last detail. However, if you have a good idea and a sound business plan, it is definitely worth trying your local bank, particularly if you have an existing relationship with them.
Credit cards are an easy way to raise quick capital, but think it through before you start spending on the plastic. On the plus side, minimum repayments will be low, but on the down side, interest will be high and over time the cost of borrowing will be considerable. Your credit rating is also at risk if you run into cash flow problems and fail to make the minimum repayment.
Not all start-ups are eligible for standard business loans. Some people have a poor credit history through no fault of their own and are therefore never going to qualify for funding from a high street lender. There are alternative lenders who offer specialist lending for higher-risk applicants. The interest rates will be higher, but for smaller loans this should not be too much of a problem.
If you have sufficient equity in your home and you are sure your business idea is sound, one option is to take out a home equity loan. This releases the money tied up in your most valuable asset at a lower interest rate than would be available on a commercial business loan. This method is not without risk, however, and if your business goes bust and you default on the loan repayments, you will lose your home.
Crowdfunding is a popular buzz-word right now and there have been a number of successful crowdfunding campaigns featured in the press. The premise is fairly simple: you showcase your business and ask for investment. Ordinary consumers then decide whether they want to help you. Crowdfunding can be very successful, but only if you have a great idea and are happy to work hard at creating interest in your story.
Angel investors are a combination of mentor and investor. An Angel Investor will typically invest in your start-up in return for a share of the business, although you will be able to retain a controlling share. Your Angel will be there to help mentor you as and when you need it, which for a new start-up with very little experience of running a business is often an extremely useful service.
Once your business is well underway and you are generating revenue, a venture capitalist may be willing to invest in you. For a business in the right sector, there is potentially a lot of money on offer from Venture Capitalists, but this funding is normally only available to larger businesses with greater stability.
Grants and Funding
Don’t overlook the possibility that there may be grants or other types of funding available. Young entrepreneurs may find that they are eligible for government funded grants to help them start a business. There are also charitable organizations that provide funding to support new-start-ups in certain sectors. Some grants come with no-strings attached, but others don’t, so read the small print before you start filling in an application.
With so many options to choose from, you shouldn’t have a problem finding at least one funding option to suit your needs. And if one lender shuts the door in your face, keep trying until you find someone who believes in you and your business.