Funding Guidelines for Small Businesses
So, you have an idea for a business. You’ve taken steps to determine your product, who your intended customers are, and how you’re going to sell your product or service to them. Now comes the hard part, or rather, the harder part on a long list of other hard parts. Securing funding to turn your idea into a reality.
There are many different approaches to funding an early stage business, and it’s a crucial step in your entrepreneurial journey deciding which route is right for you and the growth of your idea. Today we’re going to outline several of those options and the pros and cons of each, along with some resources that could assist you in making your decision.
Personal Financing
Personal financing, or bootstrapping, is the most idyllic way to fund your small business, but for our purposes I’m going to assume that if you had all the money you needed to get your idea off the ground sitting in a savings account, you probably wouldn’t be reading this article.
Personal financing can be as simple as using your own money to fund your business, but it can also refer to utilizing your other personal resources, such as asking for the support of family and friends, tapping into your 401k, or using your home as loan collateral.
Many small businesses owners opt into starting their business very small, as a side hustle, and continue working their day job as well as working on their business as a way to make the transition less financially taxing and cutting out some of the risk during the early stage. As the business picks up momentum and becomes more financially stable, options can be reassessed.
Perhaps you have a partner with a stable job who would be willing to take on the brunt of your household finances while you pursue your business idea. Or maybe you have a supportive family member who is willing to loan you the money and arrange a flexible plan for being paid back.
The benefits of these options are keeping complete control over your business, as you aren’t selling shares of control or future profits to investors. You are also minimizing debt and avoiding high interest rates by not taking out loans from banks or loan agencies.
The downfalls of personal financing can include taking on all of the risk; if things don’t work out you could lose your money, your home, or your family or friends’ money. Perhaps a close relationship is soured by the inability to pay back a large sum of money, or pay it back in a timely manner.
As with any of the options we will outline here, we highly recommend working with a financial advisor to assess what options are available to you that involve the least risk and highest chance of success for you and your business.
Bank or Credit Union Loans
Banks and credit unions are trusted and well-established funding resources. With a loan, you can still retain control over your business and over time have the opportunity to establish and grow the lending and banking relationship, which could help you acquire additional funding in the future.
However, banks and credit unions can have rigid requirements and may be unavailable to you if you have a low credit rating, or if they are unsatisfied with your cash flow and income. Securing loans from banks and credit unions can also be a slow process, sometimes taking several weeks. Loans can also come paired with high interest rates which can make it difficult to keep up with payments and means that you pay more over time on the amount borrowed.
If you chose to pursue a loan, we recommend going into the meeting with all of your details in good order. The bank or credit union will likely want to see your work history, a credit report, proof of collateral assets, and a detailed business plan with expense sheets and cash flow projections. We also recommend going to a small bank or credit union, which are more likely to loan the funds and work with you on your options. There are also some financial organizations focused solely on funding small businesses and working with entrepreneurs to help them secure financing.
Local Highlight:
Southern Minnesota Initiative Foundation
Southern Minnesota Initiative Foundation (SMIF) is a regional development and philanthropic organization that fosters economic and community vitality through a culture of collaboration and partnership. SMIF’s Small Enterprise Loan Program supports small business owners and start-up entrepreneurs with investment amounts ranging from $2,000 to $35,000 available to businesses engaged in manufacturing, retail, service, or local food. These funds can be utilized for inventory, supplies, working capital, and equipment.
SMIF works with loan clients to provide them with free technical assistance which includes QuickBooks training, marketing ideas, and scholarships for continuing education.
To learn more about SMIF and how they could assist you on your business journey, take a look at their services, loan terms and criteria at www.smifoundation.org
Selling Equity to Investors
There are a variety of individuals and organizations who may be interested in investing in your company. Angel investors and donors are usually high net worth individuals who have excess funds available and are seeking an investment with a higher rate of return than other, more traditional investment opportunities. The funds provided by angel investors may be a one-time investment to help the business get off the ground or potentially involve ongoing support to carry your business through its challenging early stages. In exchange, angel investors get a share of equity in your business, though usually without infringing on any decision making components.
On the other hand are venture capitalists, who are similar to angel investors in that they are groups or individuals seeking to inject capital into your business, however, venture capitalists are usually focused on high growth companies with big money making potential and to secure their support you will need to forfeit both equity shares and some control of your business.
With both of these options comes large potential for beneficial relationships and the quick growth of your business. However, choosing the wrong investor can leave you paired with a poor fit for yourself and your business, so we recommend taking your time in choosing an individual, company, or group that aligns with your ideals and long term goals for your business if you choose to pursue this route.
Grants
There are many grants available to businesses and are an ideal way to fund your business, if you can get them. Because free money is golden and comes without the laundry list of interest rates, term lengths, refinancing, and APR, one can see why grant funding would appeal to many. Because of this, securing grants can be an arduous and competitive process, requiring much time dedicated to filling out applications, searching for the right fit, and making sure that the funding can be used for what you intend.
If you find a grant that is a good fit for your business, we recommend that you be very specific in your application about what you will use the money for should you secure it. This increases your chances of landing some funds.
Crowdfunding
Many of us are familiar with GoFundMe and other money raising platforms. Crowdfunding has become a much more popular way for businesses, particularly small scale ones, to raise funds to get their ideas off of the ground. All you have to do is sell your idea or story to the masses and hope that it makes enough of an impact to get a donation.
While there are few strings attached to this form of financing, raising the thousands of dollars your business needs may take a long time if donations are rolling in five to twenty dollars at a time, and you run the risk of exhausting your audience with constant calls for support. But this method can also be simple, fun, and effective with the right approach.
Ultimately crowdfunding can’t hurt and there likely will be at least some small return on your efforts, just make sure to choose your website platform wisely and weigh the pros and cons of each option.
At the end of the day, the options for financing your business may seem complicated and overwhelming. Before you take a stab at any of the aforementioned methods, we recommend working with a financial advisor as well as connecting with a local small business resource. Talking through your business idea and the financial hurdles you’re facing with a money and business savvy professional can make all the difference in moving the right direction.
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