Finding money to start a business is easily the most common query we get, so in this page we are going to take you through a step by step process on what your various options might be. We will explain the advantages and disadvantages in each case, and we are going to try and get you to think about how much money you really needs.
First we need a plan.
Before you begin looking for money, you need to first have an idea of how much you will need. This is where a reasonably detailed business plan will help. You should consider two groups of costs, namely the setup costs which is all the money you will spend to setup the business before you can make your first sale (research, marketing, design, stock , equipment, infrastructure, for example) and secondly the running costs which you will need to pay each month until your sales are high enough to make a profit (electricity, petrol, bank charges, salaries, phone calls, for example)
In addition you should have in your head an upper limit of what you would like to get your business started as quickly as possible and the lower limit which would be the bare minimum to get your business going.
The first place to look for money is from your own savings. This is obviously the easiest way to fund your own business but only if such funds exist. The reality is that hardly any of us have money lying around which we could use to start our business, but we had to mention the option because it can make your life a lot simpler if it is an option. The pros are that it is immediately available for use and you don’t have to share any future profits with other investors. The cons are that if the business fails, you lose that money, so make sure its not money that is needed for important things such as schooling, living expenses or retirement.
The next common place to look for business funding is by taking out a bank loan. Its pretty much the most well known method of raising funds for business, but you need to understand that banks do not take risks. They might ask for a business plan to see if your idea is remotely feasible, but their main requirements is that you have an asset as collateral for the loan. So they will want something like a property or an insurance policy that they can sell to get their money back if you fail to repay the loan. Trying to get a business loan from a bank without having any of your own assets is virtually impossible.
The pros of a bank loan are that they are easy to get if you have the assets and they can be most helpful in setting up accounts. The biggest con for a bank loan is that they have every trick in the book to make sure you repay that loan. They will become ruthless in their efforts to get back every last cent you owe them, including interest and legal fees. You will personally have to pay that loan back if the business fails, and remember interest payments are due every month while you have the loan.
Friends and family loans
Sourcing money for your business from friends and family is an option, but it can have lots of problems. Firstly mixing business and friendship can be a bad idea. So much can go wrong and damage the relationship. Secondly, no one likes to be asked to lend money. It puts pressure on their own finances and thats not fair for you to do to them.
If you do insist on going this route, at the very least please draw up a simple agreement as to what the money will be spent on, when it will be repaid , will there be interest, what happens if you cannot pay it back, and any roles or responsibilities that either party will have.
Small business investors
So far we have covered the more traditional routes of finding money to start a business, but most people don’t have a realistic chance of using any of the above – otherwise we would have many more businesses on the go. Now we need to look at finding investors that will be prepared to invest money in your new business. There are quite a few options available out there, but none of them are simple.
Basically investors will put their hard earned cash into a business only if you can give them a very good reason to do so, and that reason has to be believable. Most investors want to earn more money from investing in your business. Some Government programs will want you to employ a certain number or type of employees. Your challenge is convincing them that their money is safe with you and the chances of their rewards are very high. Promises aren’t good enough. This is where research, experience, trials and detailed figures can help your cause and you will need to pay a lot of attention to your business plan.
Typically investors will look for business ideas that are a little different from others and that have a chance of high profits. Viable ideas that fulfill both these requirements are not easy to come by. If the business has already started trading and has a track record, this makes their decision easier and their funds will then be used to grow the business rather than start it up.
We have created a separate page with all the investor links as there is a lot of content . It includes information on angel investors, small business incubators, crowd funding and the like.
Boot strap start up
So you have read through all the options presented to you above and still you are looking for a way to fund your new business. You are one of many. All the above options only provide a funding solution to a small and specific group of entrepreneurs. Most are left with no viable funding solution.
The only remaining option is what is known as boot strapping your business. Basically its when you use minimal cash to start (normally your own tiny amount) and use customer sales to fund the running and growth of the business. Yes we know its a very unsatisfactory solution, but its pretty much all you have left and you need to get your business started. We will quickly guide you through how this process can work for you.
The first step in the boot strap process is to manage your expectations. By this we mean you need to change how you are envisioning your business at startup. For example: If your business idea is to supply car polish to various car auto part stores in your city, you might have a vision of your business where there is a store room full of polish to sell, a vehicle for deliveries, an office with someone taking orders and speaking to customers and so on. This vision has some very expensive costs in it.
This image is what your business might look like in two years time. For now your vision needs to change. To start off for example you could buy a few cans of polish for samples and visit customers with them. When they order, you use their payments to buy the stock and send directly to the store either using your own transport or by courier. This is much harder and slower, but it costs almost nothing to setup.
So your first step is to picture your business in its simplest form without the frills and that is where you will start. Absolute minimum setup costs.