To start a business, you need money. One of the first and most important decisions most business owners make about money is how to fund their business. How you choose to pay for your business could change how you set it up and run it.
Find out how much money you’ll need.
Every business has different financial needs, so there is no one-size-fits-all financial solution. The financial future of your business will depend on how much money you have and what you want to do with it.
Once you know how much money you’ll need to start your business, you can figure out how to get it.
Self-funding is a way for you to pay for your own business.
Self-funding, also called “bootstrapping,” lets you use your own money to support your business. You can self-fund by getting money from family and friends, using your savings, or even taking money out of your 401(k) (k).
When you self-fund your business, you control it fully, but you also take on all the risk. Be careful not to spend more than you can afford, especially if you decide to take money out of your retirement account early. You might have to pay expensive fees or penalties, or you might be unable to retire on time. Before you do anything, you should talk to the person in charge of your plan and a personal financial advisor.
Source For venture capital from investors.
Venture capital investments are a way for investors to give you money to start your own business. Venture capital is usually given in exchange for a share of ownership and a role in running the business.
Venture capital differs in many important ways from other types of financing. Most of the time, venture capital:
- Focuses on companies with fast growth
- Invests money in exchange for shares, not debt (it’s not a loan).
- takes more risks in exchange for the possibility of making more money.
- Has a longer time frame for making investments than traditional financing
Almost all venture capitalists will want to be on the board of directors at the very least. So you should be ready to give up some control and ownership of your business in exchange for money.
How to get money from venture capital
There is no surefire way to get venture capital, but the steps to get it usually goes in a particular order.
Find an investor
Look for individual investors, sometimes called “angel investors” or venture capital firms. Make sure you do enough research to find out if the investor is trustworthy and has worked with startups before.
Give people your business plan.
The investor will review your business plan to see if it meets their requirements for investing. Most investment funds focus on one industry, area, or stage in the growth of a business.
Review your due diligence
Investors will look at your company’s financial statements, corporate governance documents, market, products and services, and management team.
Figure out the details
If they want to invest, the next step is to agree on a term sheet that spells out the rules for the fund to invest.
Investment
Once you agree on a term sheet, you can get the money! Once a venture fund has invested money into a company, it becomes involved. Most venture capital comes in “rounds.” As the company reaches specific goals, it can get more funding, and the price changes as it works through its plan.
Fund your business with crowdsourcing.
Crowdfunding is a way for a business to get money from many different people. These people are called “crowdfunders.” Crowdfunders aren’t really investors because they don’t get a piece of the business and don’t expect their money to make their money.
Instead, they expect to get a “gift” from your company as a way of saying “thank you” for their donation. Usually, that gift is the product you plan to sell or some other special perk, like meeting the business owner or getting their name in the credits. Crowdfunding is a popular way for people who want to make creative works (like a documentary) or a physical product to get the money they need (like a high-tech cooler).
Crowdfunding is also popular because business owners don’t have to take on much risk when they do it. Not only do you keep complete control of your business, but if your plan fails, you usually don’t have to pay back the people who gave you money. Every crowdfunding platform is different, so make sure to read the fine print and understand all of your financial and legal obligations.
Get a Small business Loan.
Consider getting a small business loan if you want to control your business fully but don’t have enough money to start.
You should have a business plan, an expense sheet, and financial projections for the next five years if you want to get a loan. These tools will help you figure out how much you should ask for and show the bank that lending you money is a good idea.
Contact banks and credit unions to ask for a loan once you have everything you need. It would help if you compared offers to make sure you get the best loan terms possible.
If you can’t get a regular business loan, you might want to look into SBA-guaranteed loans. The U.S. Small Business Administration (SBA) can agree to back your loan if a bank thinks your business is too risky to lend money to. So, the bank will have less risk and be more likely to lend your business money.
You can use Lender Match to find lenders who offer loans backed by the SBA.
SBA programs for Investing
Small Business Investment Company (SBIC): An SBIC is an investment fund that is privately owned and run. The SBA licenses and oversees these funds. They use their own money and money they borrow with an SBA guarantee to buy equity and debt in small businesses that qualify. Find out more about SBICs to see if your company might be eligible.
SBIR stands for the Small Business Innovation Research program.
This program encourages small businesses to work with the government on research and development that could be sold to the public. Check to see if the SBIR’s program of competitive awards makes sense for you.
STTR stands for the Small Business Technology Transfer program.
This program offers funding options for federal research and development in the area of innovation. Small businesses that are eligible for this program work with non-profit research institutions when they are just starting up or are in the middle of getting started. Find out if your business can benefit from the STTR program.