Although there are some businesses that were started with pocket change, most new businesses require money when starting up. The majority will need to buy equipment, establish a workplace and incur marketing costs – all before a sale is even made. As soon as the business starts trading, then there will be a requirement for cash to pay the bills and keep the business running.
There’s a range of financing options when starting up and running a business so it’s essential to choose the right ones to match your current status and your future requirements. Good planning will make it easier to raise the money the business requires.
It’s essential to have a written business plan to explain your business to banks and other potential resources. A good plan helps convince investors that you know what you are doing and that it’s worth risking their money in your business.
When you are choosing the best financial options, you might explore the advantages and disadvantages of the following resources:
1. Using your own money from savings, investments, equity, etc.
When starting a business, you’ll most likely have to put up at least some of the money. Most banks or investors will not put money into a business that the owner isn’t willing to fund.
2. Borrowing from family and/or friends
Friends and family may be more willing to lend money to you than a bank. Their repayment terms could be easier for you, but do treat them like any other serious source of funding by having a business plan showing how their money will be used. Understand that this could put a strain on your relationship particularly if your business starts to struggle. Never ask them to lend you more than they can afford to lose.
3. Bank loan
Overdrafts, credit cards and bank loans are the most common sources of finance. The overdrafts and credit cards are the most expensive way of borrowing. Banks will certainly want to know that you are a good risk. They’ll ask for a business plan, evidence of a successful track record, security and your own investment.
4. Outside investors or partners
Acquiring outside investment can be suitable for promising businesses that don’t expect to produce a lot of extra cash in the short term, but offer the potential of greater returns over a longer period. Business angels typically invest $10,000 and more along with offering business expertise. Whereas, venture capitalists usually invest more than $2,000,000 in businesses when they believe they will receive a high return on their investment when exiting,
5. Grants and government support.
The main advantage of grants is that it’s cheap financing. Check into subsidized or zero interest loan along with possible outright cash grants. Quite frequently the support schemes will offer advice, information or subsidized consulting. However, it’s important to note that there’s strong competition for grants.
Using a combination of these alternatives could be a consideration for many businesses depending on their needs and circumstances. As an example, you might invest your own money in market research; and then seek outside investors to share the risk and borrow from the bank to fund equipment and machinery purchases. Carefully explore your options to make the best choices when you are starting and growing your business.