Finding enough money to cover the initial costs of your business can have significant long-term impacts. In addition, poor financial planning can result in unforeseen events hampering the business in a major way. For example, imagine a retail store receives their order from the supplier three weeks later than expected. Coupled with poor inventory management, this could lead to lower sales for the month. Having a sizable cash cushion to deal with unexpected events will prove helpful in the long run. We’ll break down the options for financing your business, along with some of the challenges of each source.
Self-Financing:
High risk = high reward. Using your own personal funds will give you autonomy to run the business any way you seem fit. It will also leave you with no interest payments to be made in years to come. However, this may mean cashing out your 401(k) and savings, as well as living a more restricted life-style while the business is in its early stages. Be sure to keep your estimates cautious, and don’t underestimate how long the business may go on without any profits.
Small Business Loans:
The SBA Loan program is one of the most popular funding methods for people without sufficient capital of their own. The Basic 7(a) Loan Program is eligible to borrowers for starting, acquiring and expanding businesses. While repayment terms vary depending on a number of factors, the average amount borrowed in 2012 (last year of information) was $337,730. Their is also the microloan program which offers up to $50,000 to cover the costs of working capital, inventory, supplies and the like. Other options are available for specific needs, such as loans for property or disaster relief.
Keep in mind, taking out a loan in excess of what is needed will create a larger liability for the company and servicing the debt will cut into the bottom line.
Selling Equity:
Selling ownership in your business, whether it’s to a venture capitalist or other investor, can be a way to raise significant capital while also acquiring additional expertise. However, this might also mean giving up partial control and compromising on some of your visions for the business. Ensuring that the investors vision for the company aligns with your own should be the foremost important factor when faced with the decision to sell a piece of your company. Discussions about the companies future should include the investors time horizon, or how long they can wait before they want to cash out and sell the business. Ultimately, an investor with industry connections and expertise can help catapult your business to the next level if visions are aligned.
Crowd Funding:
One of the more recent innovations in fundraising has been the boom of the crowd funding platforms. Websites like Kickstarter and Indiegogo offer platforms to pitch your business idea, along with the amount you wish to raise. For example, Indiegogo offers an ‘all-or-nothing’ funding plan, in which you only receive the money if the funding goal is met, at which point you will pay a 7% fee. On the other hand, the ‘flexible’ funding plan allows you to keep any money raised, even if you do not hit your goal, but the cost be anywhere between 7% – 12% of funds raised.
The success stories have been well-documented, like this 3D printer, but a successful campaign requires a network of people in the right places.
