Startups Tuesday: Securing Funding
Posted by Megan Webb-Morgan on February 19, 2013 in Business Start Up Advice [ 0 Comments ]
Securing adequate funding for your startup business can be difficult, if not seemingly impossible. With the loan industry in constant flux, it’s hard to know what you’re funding future looks like.
However, with sufficient advance planning and a solid business plan, you can access both traditional and less well-known sources of small business funding to make your entrepreneurial dream come true.
Before You Ask for Funding
Whether you’re approaching a bank or your best friend for funds, you need to present them with a cogent argument for why you need the capital and how you’ll pay it back. You will make this argument in the form of a business plan – without it, you won’t be able to source funding for your startup idea.
- Your business plan should include a thorough description of your business, financial projections, cash flow assessment, and a competitive market analysis. It should also include an assessment of your financial needs, and how having those needs met is integral to your business’ success.
- In addition to your plan, you should also bring people on board – advisors, investors, partners, and future employees – who have the skills and experience to help make your business sustainable.
Traditional Sources of Funding
According to the US Small Business Administration, the largest percentage of startup funding and equity comes from the personal capital of the entrepreneur and their friends and family. If you choose to solicit funding from friends and family, be sure to put a legal agreement in place regarding the responsibilities and expectations of each investor.
Confusion regarding the terms of the loan can cause personal strife if not laid out clearly in advance. In addition to soliciting funds from this group, startups have access to:
- Personal loans. These are based on your personal credit score and personal equity. These comprise 13% of the average startup’s funding. Be aware: the failure of your startup can put your personal finances at risk should you default on a personal loan.
- Bank loans and SBA-backed small business loans. Although most banks do not lend to small businesses until they have existed for two or more years, you may be able to receive a small business loan backed by the SBA.
- Grants. Depending on what industry your startup is in, you may be able to access Federal grants like the Small Business Innovation Research and Small Business Technology Transfer grants, Federal programs for minority business owners and other special interest groups, or a Small Business Administration Grant.
In addition to the various loans and grants available to small businesses, there are other, less traditional, ways to get your startup off the ground.
- Crowdsourcing. With the growth of the internet has been the growth of crowdsourcing – using the internet to solicit small amounts of money from a large number of people. Rather than asking 10 people to give you $5,000 each, you ask 5,000 people to give you $10 each. If your business is unique, has an interesting story, or comes with a memorable or emotional angle, you may be able to use crowdsourcing to acquire the funds you need.
- Reduce Your Costs. If you don’t get enough funds to adequately start your business, your business will not grow. However, you can make your funding stretch farther by cutting costs, reducing the amount of money your business needs in order to be successful. Consider renting or leasing equipment rather than purchasing it. Look for used or refurbished equipment, electronics, and furniture to keep costs down.
If you prepare in advance, look into loans and grants, and reduce your operating costs, you can secure the funding you need in order to fully finance your startup and make it a success.