By Brittany Lorenzi & Carson Fears
There are numerous ways to fund your small business; in fact, there are more ways today than ever before. This works to your advantage, but it can also make funding appear more complicated and daunting than it really is. We think funding your venture should be straightforward - after all, you do have a business to run. So let’s break it down and highlight your options.
This is the first of a two-part series on business funding. Here we will discuss first stage funding, i.e. personally financing your business. Next time we’ll cover second stage concepts, such as finding angel investors and venture capitalists.
If you own a small business, odds are you started it out by spending your own money - and that's great. Personal financing offers several benefits. Namely, you retain total control of your company. Getting a new venture off the ground can be challenging, and bringing in investors or part-owners too early can create quite a headache. While you’re just starting out, personal financing is a good idea. This is a chance to work towards fulfilling your vision for the company. This is “big picture” time. Use it to develop your business model, design a strategy, and identify your target market. You’ll be all set to pitch for capital when that stage arrives.
Many startups benefit from the generosity of friends and family. When you feel confident in your idea, consider inviting friends or family members to chip in. Fair warning: be careful not to promise lofty goals or unrealistic returns. Strive for transparency, especially in describing the risks and trials that lie ahead.
Alright, disclaimer aside, this may actually be your best chance at getting started. Family tends to be kinder than venture capital, anyway. Draw up a simple business plan and go for it.
When these contributions won’t suffice, consider applying for a bank loan. Brittany Lorenzi, founder of BluePrint Strategy, recommends developing a relationship with your bank early on. “Apply for a line of credit before you need it, because it can be difficult to obtain financing in a pinch.” Just be wary of high-interest loans, and avoid purchasing too much on credit.
Whatever path you take, money will be tight. Some savvy entrepreneurs have discovered the value of “bootstrapping,” a cost-minimizing technique that involves careful budgeting and creative thinking. While this technically isn’t a funding method, the topic couldn’t be more relevant to personal financing. Your business’s success depends as much on strategic budgeting as it does adequate funding. A few good bootstrapping ideas include completing tasks in house versus hiring others, reducing overhead by using a home office, and forming strategic partnerships with other business owners. For example, your cupcake bakery might provide refreshments for a portrait studio, which in turn provides artwork for your storefront.
Crowdfunding sites like Kickstarter.com have introduced business owners to an entirely new funding concept. These platforms allow groups or individuals to describe a project or business opportunity and request pledge money. There is no income potential for lenders; instead, they expect to receive a unit of whatever product or service is being developed. This method is best suited for short term projects with specific goals, so it benefits startups or companies with specific initiatives.
Whatever financing method you take on, be prepared to make good on your promise. Ask yourself, “Can I really deliver?” Again, make reasonable estimates about your capability. There will be a time for scaling up, but right now you want to protect your image and avoid gaining a reputation as a company that doesn’t follow through.
The bottom line: small business funding isn’t as complex as it appears. Often the methods above are used in conjunction with each other, providing a startup with multiple sources of funding at once. We hope this brief overview is helpful, but encourage you to learn more and determine which methods fit your particular strategy and objectives. Next time, we will discuss how to reach out to investors and other parties as our series continues with “Second Stage Business Funding.”