There’s a problem when trying to write an article about start-up finance. There are so many different types of businesses that there is not a ‘one size fits all’ start-up finance solution. It really depends on what type of business you are wanting to get financing for.
So, with that in mind, we’ve included at least one type of financing option which will suit the business you’re interested in starting. Let’s begin with a popular option:
Friends and Family
This one really depends on what sort of relationships you have with your friends and family but if you are lucky enough to have relatives or friends who are willing and able to lend you money, this is probably the easiest way to fund a start-up.
However, it is still important to approach your friends and family in the same way as you would approach a start up loan officer or your bank manager. You can’t expect people you know to hand over money if they don’t know what it’s for, if they are going to get it back any time soon, and what (if anything) they are going to earn from their loan/investment.
If you think your business idea is a serious winner and you have supportive family and friends (which, of course, not everybody does), you may want to consider a group presentation or read-through of your business plan. That way you can show how serious you are, what work you have already done to get the business ready for launch, and what kind of return on their investment your supporters can expect (if this is something they are looking for).
One of the big advantages of borrowing from friends and family is that friends and family are normally more flexible when it comes to paying back any loans. They are also often willing to lend money without charging high interest rates, and sometimes without charging interest at all. No commercial loan can compete with these terms. But, beware; if the project doesn’t take off in the way you hoped, are your backers going to be forgiving of this, or will it cause tension within your family? These are questions to give serious consideration to before approaching friends and family.
Another option with more favourable terms than a commercial loan is government grants.
However, they can be hard to come by. The problem is not that the government doesn’t want to give you the money. As 95% of all businesses in the UK are Small and Medium-sized Enterprises (SMEs), the government is, in fact, very supportive of new business, knowing how incredibly important it is to the economy.
The real problem is that the process of applying for them can be very laborious and tightly controlled, and it can be highly competitive.
Nevertheless, if you’re experienced in the ways of government bureaucracy and believe you can navigate the stormy waters of business grants, then this may be a good option for you. It also helps if you don’t need the money quickly and you have a lot of spare time on your hands to put towards the application process, of course.
Look for Venture Capital
Venture Capitalists (VCs) have a bad reputation and to a certain extent, it is probably deserved. However, they are very good at their jobs. If you think your business is going to be worth a fortune and the VCs agree with you, then you are almost certainly going to get some money.
One of the big advantages of having VCs on your side is that you will have an outsider looking at your business with a more dispassionate eye. They may be able to spot problems in your business; for example, cash flow, that you may not be experienced enough to see.
Of course, there are quite a few disadvantages to getting VCs involved. For one, they don’t care about your business so don’t think that they’ll love it as much as you do. And, you lose substantial control, of course, as capital is almost always exchanged for equity in your company. Well, you can’t expect to get VC financing for free.
Get into Crowdfunding
If you read an article about start up finance from even just a few years ago, you almost certainly won’t read anything about crowdfunding. Although the first time crowdfunding was used was ‘way back’ in 1997 and the first platform began in 2000, it didn’t really take off until 2013.
There are lots of advantages to crowdfunding. With movies, for example, you have to be quite a large investor to even get a mention in the credits. This means that many people are happy to hand over a few bucks for the opportunity to help a project they like.
Similarly with a product. There was a crowdfunded cooler a few years back and the amount needed to invest to get a ‘free’ one was not much less than the cooler was going to cost off the shelf. Still, people love to get involved and that’s why crowdfunding is so popular.
Enter Contests or Competitions
If you like watching TV, you may well have heard of a TV show called Elevator Pitch. The basic premise is that you have 60 seconds to pitch your idea. If the judges like it, they will open the doors of the ‘elevator’ and you get given a chance to share more of your idea. There are others, such as Dragon’s Den in the UK, and whilst it might only be a very small percentage of new business owners who make it through (or even apply) to these kinds of shows, it has to be worth a shot if you think you’ve got a good idea and it would benefit from the exposure and feedback. And, of course, you might just win.
Wrapping It All Up
No matter what approach you end up taking, talking to a professional about your options is a good idea. Quite often, they will have ideas that you aren’t even aware of. Those ideas might end up saving you substantial amounts of money and opening all sorts of doors to your business, and your road to success.