One of the main reasons so many of the new startups fail is borrowing money! They get the wrong type of loan, pay too much in interest, don’t try to get the best terms, and don’t take advantage of the tax breaks they can get as business people.
These mistakes usually happen because most entrepreneurs aren’t experts in lending or credit; they are only experts in running their business.
But, navigating all the different types of loans available to not an easy task. Ask any entrepreneur, and they’ll tell you that funding your small business can be one of the toughest parts of getting started. One of the most common false impressions some owners might have is that they must raise a lot of money to use up front if they want their business to succeed.
If you’re thinking of starting a small business but are worried about its financial stability, this article will examine the different ways you can get the financial support your business needs.
Do it Yourself
Nowadays, numerous business people have come to the conclusion that it is better to self-fund their visions and projects until other funding opportunities come along. There are several ways to accomplish this self-funding idea such as a savings account, leveraging their personal assets or with zero interest credit cards.
You should feel comfortable investing your own assets and funds into your idea; after all, you need to believe in your vision and never accept failure as an option if you want your idea to succeed! Why would anyone trust your vision with their funds if you cannot do that yourself? It can make your business idea more appealing to investors if they know you have a vested interest in the venture succeeding!
Family and Friends
Asking your family and friends can be a great help for any startup. Funding from friends and family is a popular and effective way to get up some initial funding for your business. The people who are the closest to you are more likely to believe in your vision and your abilities and provide funding.But, one of the major downsides to this option is that you are risking personal relationships if your vision fails and you owe them money. If you want to avoid having these conflicts with your family and friends, it’d be better to structure your agreement as a high-interest loan for at least one year.
You also need to make sure that you only borrow just enough for you to launch your business idea, build a website or develop a great pitch if you need more money. If you have relatives who can help you they won’t pressure you the same way a banking institution would.
If used correctly, it can be one of the best ways to raise money for your small business by leveraging the right contacts and right timing. But, you need to keep in mind that just because someone can lend you money for your vision, it doesn’t mean that they will also be great financial partners in the long run. When angel investors give you money to launch your business, remember that they will also own a piece of your business, therefore, you need to be aware and act - should the need arise - in the best interests of your company.
Trying to get the attention of angel investors can be a risky business so make sure to be transparent, know your business plan and back up your visions with real projects as well as build a strong and trustworthy relationship with your investors.
Getting a Loan from Your Bank or Other Institution
Another option is to get a loan from a bank. This can be a difficult process as you need to be ready to present a business plan. So, make sure you do your research properly and have your plan ready for your meeting with the bank.
An Agreement concluded between the Borrower and the Lender that sets out the terms and conditions of a loan.
Alternatively, you may seek ‘Equity Investors’ to invest in your company. This option is mostly used by startup businesses who are looking to help kick start their company. These investors will buy a piece of your company and will help you out financially in return.
However, if or when your company becomes successful, this means they will have some rights to your success. Nonetheless, if the business does not go as planned, you don’t have to give investors the money back.
Securities laws exist to help manage the sale of interest to the equity investors. The purpose of securities laws is to ensure investors receive accurate information concerning their interest. It is advised to carry out solid research on this to see whether it is suitable for you. Like many laws, securities laws come with their own requirements. For small businesses, there are exemptions that allow there to be a limited number of investors to be part of the business with simple paperwork. But, if a company does not qualify, it must comply with the complex disclosure requirements of the law. Nonetheless, make sure you research this thoroughly to keep yourself up to date with the latest securities laws.
Choosing Between Loans and Equity
Choosing between loans or equity investment can be quite challenging as they can both seem good options for your business. Even so, the options of getting a loan or an equity investor are actually suited for different purposes. Equity is more suited for startups since they are prone to needing the financial income in the beginning stages. Whereas loans are more suited for established businesses that already have a steady income and can pay it off easier.
The advantage of a loan is that the bank, or any other institution that will lend you the money, will have no say in your business, meaning the choices you make for your company are entirely yours. Also, the loan, for tax reasons can be deducted from the company as a business expense making it one less thing to worry about.
However, loans require you to pay back the money in instalments over a period of time that might leave you feeling under pressure. Additionally, to secure a loan, many startup or small business owners use their own property as collateral that places them in a risky situation if the business doesn’t go as planned.
Equity Investors are practically co-owners of a company that legally allow them to take part in the decisions making process of the company. Although it may sound unappealing, the positive aspect of this is that they will put forward their creative, insightful ideas into the business that could help it flourish.
A disadvantage of using equity investors is that they will be entitled to a partial profit of the company once it becomes successful. Additionally, their position in the company also entitles them to be informed by the founder about every important business event. Owners who have dedicated their time to the business can be voted out of the company by the equity investors if they deem them unsuitable. If you are choosing this option make sure you choose your investors wisely.
No matter which option you choose, you may have to try all of them at some point as your business grows. At the end of the day, if you have a business to run then you need to find a viable solution that allows you to run your business and eventually focus on its profitability.
Now you know everything there is to know about raising money for your small business without failing. Just keep your eyes and options open and avoid making the mistakes everyone else makes.
Do you have any other tips on how to fund your small business? Share your thoughts and tips below…
Loan Comparison Worksheet
A document used to compare up to three different loans. This includes loan terms, costs and features.