Starting and running a business can be an incredibly rewarding experience. Unless you have the funds in your pocket, though, you are going to need some help getting off the ground. You certainly have a vision for what you want your enterprise to be, but what are the first steps you need to take to get there? You’ll have to finance your business first. When you have a sustainable platform, you’ll have a springboard to help you achieve your goals.
Financing is garnering funds for business activities, investing, and making purchases. Investopedia details two primary types of financing you can choose from – equity and debt (with Weighted Average Cost of Capital being a mix of the two).
Equity refers to company ownership. Instead of going into debt, you can sell a stake in your business to an outside party (if your venture is worth one million dollars, you can sell a 10 percent stake for $100,000). This way, your secondary investor takes on all the risk associated with your success. If you fail, they get nothing. However, you will also have to relinquish a bit of control. A stakeholder will want a voice regarding how the enterprise operates, so you will not be solely in charge of realizing your vision. Shareholders also claim some of your future earnings as compensation for investment proportionate to their contribution.
Debt financing is what you are probably more familiar with. This process entails taking out a loan, usually from a commercial bank, the Small Business Administration, or some other lender. This is money you will have to pay back, with interest. Many lenders require you to provide collateral, an item that represents a sizable investment, to withhold as an insurance policy in case you do not pay back the loan. You will have to pay back whatever you borrow no matter how your business is performing, but unlike selling equity, you maintain complete control over your business operations.
Before you decide what kind of financing is most appropriate for you, it’s best to set some goals. Attainable goals are not the same as a loose interpretation of what you want to see your business become. They detail a more intricate strategy that you can follow realistically. Assess your idea, what tools you have at your disposal, and your plan before you begin. Perform extensive market research to make sure you are meeting unmet customer demands. Look into how similar businesses in your industry are performing to set a sort of “standard” regarding what you should aim for. Conduct a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) to illuminate potential gaps in your plan.
The United States Department of Industry recommends that you set SMART goals: they should be Specific, Measurable, Achievable, Relevant, and Timely. If you are opening a bakery, as incredible as it would be, it’s unlikely that you will sell 100,000 pastries during your first month. Can you even make that many? Will you have the customer base? Can you reach them efficiently? It’s good to dream big, but the steps you take to get there should be manageable. Stretch yourself too thin, and your efforts won’t be able to keep up with your vision.
When writing down your goals, consider what you are willing to do. Whether this venture is a passion or a hobby will influence what kind of growth you can cultivate. How determined are you to see this succeed? What will you do if it doesn’t work out? Are you prepared to balance your work and social life, possibly making sacrifices? You should have a contingency plan (or multiple) should your business decline.
So where do you turn when it’s time to acquire funding? The Small Business Administration is a popular source for loans, which offers policies that allow lenders to offer longer repayment terms. You can go to commercial banks, which may provide more customizable contracts and less strict qualifications. If you lack much of a credit history or collateral that makes you an attractive borrower, you can secure a microloan from a nonprofit organization or a specialized microlender.
Angel investors are individuals on the lookout for promising businesses to invest in that will, in time, create a profit for them (you can approach these people with a well-written pitch and honesty). We at Currency Capital host a network of various lenders, so we can match you with someone who is willing to work with your needs, terms, and ideas. There are numerous ways to finance your business (you can even try crowdfunding), so do not be discouraged if an option or two do not work out.
When you set realistic goals and plan accordingly, it’s possible to realize your dreams. How will you finance your business? Contact us today if you have any questions about financing your small business. We’re always available for a call at 877-358-4595, and would love to answer your questions and guide you toward the best option for your business.