One of the first things that prospective entrepreneurs must consider when starting a new business is funding. Without the right amount of start-up capital, growing your business can be much more complicated and cumbersome than necessary.
There are many effective ways to secure the right amount of money to start your business. Here are a few ways in which entrepreneurs can get the funding that they need for their business endeavors.
Savings and Investments
Savings is probably one of the most common ways that new business owners finance their start-ups. This is one of the simplest ways that the average business owner can accumulate venture capital. It doesn’t require approval from a third party and the ability to save is completely within the entrepreneur’s control. It may take longer to save enough cash to start your business but the benefit is that you will not owe or be obligated to anyone in the long run.
If you decide to save for your start-up, it is best to place your money in a high yield savings account. These types of accounts can offer annual yield rates (AYR) of up to 2% compared to the average 0.09% AYR offered by regular savings accounts. This means that you could potentially grow your money up to 9 times faster in a high yield savings account.
Investing in the stock market is another viable, loan-free way of accruing venture capital. Gains from dividends can add up a lot quicker than savings, yet this method is also riskier than stashing money in a savings account. Though, there are less riskier investment options like certificates of deposit, bonds, and bond funds – these methods yield low and slow returns.
On the other hand riskier options like individual stocks, exchange-traded funds (ETF’s), and index funds can yield higher and quicker returns. However, with these options there is a higher likelihood of losing some or all of your investment. But if you invest wisely the gains usually outweigh the losses.
Grants are great ways to fund your business. Government and private organizations, agencies, and institutes offer a number of grant opportunities on an ongoing basis throughout the year. Most grants have specific eligibility criteria and defined deadlines for submission. However, if you meet the qualifications and deadline requirements you can possibly secure a grant to finance part or all of your start-up costs and future expenses.
The major benefit in receiving grant money is that it is free. There is no requirement to pay back grant funds. Another benefit about receiving certain grants is that they can enhance your company’s reputation and credibility and increase your visibility. Additionally, individuals in certain minority groups or protected classes such as women, and Native, Hispanic, and Black Americans, and veterans can qualify for specific grant opportunities geared toward underrepresented groups in the entrepreneur space.
Some of the disadvantages about applying for grants is that the process can be long and tedious. Usually grant applications require surmountable time and effort that can be prohibitive to new entrepreneurs who are focused on their business operations. In addition to this element, grants are very competitive. There are often many applicants vying for the same grant opportunity which makes them a less dependable financial resource.
Also, grants tend to come with specific stipulations. Grant recipients have to spend funds according to the rules or guidelines of the grant issuer. You cannot use grant funds in any way you choose. Though there are a few disadvantages to grant funding, there are a number of inherent benefits that make grants worthwhile sources of start-up capital.
Crowdfunding is another beneficial tool for securing start-up capital. This funding option requires you to solicit prospective investors or donors to finance your business or project. There are a few common crowdfunding models available to business owners which include the following:
- Investment-Based: Individuals, groups, or organizations invest in your business in return for future dividend payouts.
- Loan-Based: Individuals, groups, or organizations lend you interest-bearing loans.
- Donor-Based: Individuals, groups, or organizations give you money with or without the expectation of something in return.
- Reward-Based: Individuals, groups, or organizations give you money in return for a finished product or defined service linked to your business.
Depending on the model you choose and your ability to secure sound investments, crowdfunding can be a very useful financial tool for your business. You can raise all or most of your venture capital and long-term buy-in from investors. This is also a great way to promote your products or services to future customers.
However, there are also a few disadvantages to this method. If you set up an investment-based model you are essentially selling part of your business. If you use the loan-based crowdfunding model you will have to pay back the money you receive and oftentimes with interest. Once you choose the reward-based model you are entering into a quid-pro-quo relationship, which puts more pressure on you to deliver. If you elect the donor-based model you may receive less funding.
Additionally, you may have to pay subscription, platform, processor, or other fees when using popular crowdfunding platforms. If you set up your own website, you may have to pay money for hosting and/or promoting your website. Additionally, your reputation is as stake when you crowdfund. You have a lot more pressure to deliver on a product or service if you choose this funding option.
One of the more common ways of start-up funding is through borrowed money. This may be in the form of a business loan, credit card, or line of credit. You can borrow money from a number of sources including family, friends, and banks and other financial institutes. Borrowed money generally requires you to repay funds on a monthly basis with interest.
The benefit of borrowing money is that it is generally a straightforward process that usually takes a matter of hours to a few days. If you have good to excellent credit it is fairly easy to get approved for credit cards. And if you have stellar credit and decent sources of collateral it is fairly easy to get a business loan or line of credit.
On the other hand, it is generally difficult for new business owners to get loans from financial institutions because they don’t have an established credit history. Also, business loans bear interest. This means that you will repay more than the amount that you borrowed. Credit cards are a little better in this regard because you only pay interest on balances that you carry from month to month. Repayment of loans, credit card, and line of credit debt usually begins within 30-60 days after you borrow the funds.
These terms and conditions can add to a new business owner’s stress level. Repaying money when you have little to no business cash flow can result in anxiety. This can subsequently adversely impact the performance of your business. You may end up cutting corners, compromising your integrity, selling yourself short, overextending yourself, etc. trying to pay back money that you don’t have.
So I always recommend borrowing money as a last resort for new business owners. This includes money borrowed from family or friends. Because even if not repaying such loans has no bearing on your credit score, this can adversely impact your personal relationships and possibly your reputation.