So you have a great idea for a business and start dreaming up a business plan by getting everything in order, but you run into an issue. Most start-ups have dealt with this issue in the past and many will deal with this issue in the future: acquiring capital.
If you don’t have the ability to inject the necessary funds to get your new business up and running yourself, then you will need to acquire money from external sources.
Your Friends, Family, and Social Network:
The most familiar way to secure money for your business is by asking around your circle of friends and family for investors. But if this fails, don’t be afraid to go out and network. Take advantage of your contacts and your contacts’ contacts. The process can range from informal to very formal, with some people requiring business plans and detailed information before giving or loaning you money.
PROS: This way can be the easiest and simplest method. If your idea is considered more of a high-risk venture, these investors would probably be the most likely source of funding since other forms of fundraising are more conservative in lending.
CONS: You run the risk of having your friends and family telling you how to run the company, and as always when mixing your business and personal life there is a possibility of a deterioration of these relationships.
“When I started my company I had saved up some capital, although we started sending a monthly business update email to our close family and friends and included a “donation” link to our PayPal account. Sometimes we got donations, sometimes we didn’t. It just never hurts to ask” says Amber Hauptman of FaxCompare.com
Banks and Credit Unions:
If you’ve exhausted your contacts and still need more money, the next step most people take is to apply for a loan from a bank. The more professional and prepared you look to the bank, the more likely the bank will grant you the loan. Because of this, you need to bring your business plan, financial statements, and pro-formas (projected future financial statements). Banks are looking to see if your business can be sustainable, increasing the likelihood the loan gets repaid. As a young start-up, your business will likely have little credit history of its own. In this case, banks will place emphasis on your own personal credit history to determine whether you are likely to pay back the loan. The better credit history you have, the better the chances you have of getting the loan.
PROS: This is usually a standardized process so if you fail getting a loan from the first financial institution you go to, you’ll know what to expect and what to improve on for your next try. Also, banks won’t tell you how to run your business after giving you the loan.
CONS: You must pay interest and your personal assets can be at-risk if your business falters.
A way to get money that has become popular over the last few years is through crowd-funding. You put up an idea or a business online and anyone in the world can donate to your fund. Some popular crowd funding sites are Kickstarter, Pozible, and Sponsume. Donators get rewards for donating. The rewards can range from simple certificates of thanks for small donations to more obscure and extravagant rewards for higher amounts. One project on Kickstarter advertises that the co-founders will crash your birthday party if you donate $5,000 or more. Some crowd funding sites are designed for specific industries, but others welcome any idea, like Pozible. The website states that it is “developed for artists, musicians, filmmakers, journalists, designers, social change makers, entrepreneurs, inventors, event organizers, software developers and all creative minded people to raise funds, realize their aspirations and make great things possible.”
PROS: This way allows you to raise a lot of money quickly as well as gain free exposure for your project.
CONS: To be successful this way your business idea must be one that piques the interest of lots of people. Doing it this way also adds the risk of it being copied before your business even starts.
About the author: Andy Nguyen is currently a Research Intern at ChooseWhat.com, a guide to help entrepreneurs start their business. ChooseWhat also runs and operates ChooseWhat.com and a conglomeration of SAAS comparison sites, like FaxCompare.com. Andy is also a student at The University of Texas’ top-rated McCombs School of Business.