4 Smart Ways to Fund Your Small Business Venture
Having a solid business plan or pro forma financial projections will help you figure out how much money you’ll need to start your business. If you don’t have that amount on hand, you’ll need to either raise or borrow the capital. US Small businesses have traditionally been an important driver for economic recovery when it comes to hiring workers, but hiring can require capital, and capital in the past few years can be hard to come by. Fortunately, things have changed in the last few years, and there are many ways to find the capital you need to grow your small to medium sized business.
Funding Your Small Business
What you need most when starting a business is money. And, the method by which you choose to fund your new company is one of the most critical aspects of success. The financial decisions that prospective start-up owners make will have an enormous impact on the longevity of your business. A careful process should be followed for funding and it’s usually best to employ the services of a qualified CPA. Businesses are unique in the sense that they all have different needs and requirements- an owner’s financial predicament and vision will determine how well a business competes in the market. Funding is not “one size fits all” and this article will cover the following funding methods:
- Self-fund Your Business
- Obtain a Small Business Loan
- Attain Venture Capital Funding
- Create a Crowdfunding Campaign
Self-fund Your Business
Using your own assets, if liquid, to fund your business leverages your financial resources; it is otherwise known as “bootstrapping.” By assets, we are referring to savings accounts, possibly tapping into your 401k or even borrowing money from friends and family.
The positive thing about self-funding is that you, as the owner, will maintain complete control of your company. The negative aspect is that self-funding comes with a plethora of risk. For instance, you must be very cautious not to spend more than you can afford. With 401k accounts, you want to make sure you still have enough money for retirement since early withdrawals carry a penalty tax. Your 401k administrator can give you concrete dollar figures as can a financial advisor or accountant.
Obtain a Small Business Loan
Another way to retain 100% control of your business is to take out a small business loan. Securing such a loan is not the easiest thing in the world and when you apply you should come prepared with a lot of backup materials and files. At the bare minimum, come armed with your company’s business plan, five years worth of financial projections and expense sheet. These items will help you, as the business owner, and your potential lender to make a decision. They will benefit you because you can get an idea of how much money you actually need to borrow. They will benefit your potential lender because all these items will show a bank that it is making a smart decision. Don’t forget to contact more than one institution because you should most definitely do your research and compare offers and terms.
Attain Venture Capital Funding
Venture capital investments are those investments which give you funding to start your business. Undeniably different from traditional financing, venture capital has unique characteristics. Some of the most important contrasts are the following:
- High-growth company focus
- Exchanges possible higher returns for a higher risk
- Longer investment horizons than conventional financing
- Instead of debt, capital investments are designed for return for equity
Prepare yourself for the venture capitalist you collaborate with to request a seat on your board of directors. Take into serious consideration that you will be relinquishing a fraction of both your ownership and overall control and business direction.
How to Acquire Venture Capital Funding
We’ve compiled a guide, in list form, for how to go about obtaining venture capital funds. The steps listed are basic but there is no way to guarantee a deal. Here are the steps we have outlined:
- Seek out an investor. In particular, be on the lookout for individual investors who are often referred to as “angel investors.” Also, contact a wide range venture firms and conduct intensive research to be certain that your potential venture capitalist is qualified and has experience working with startups.
- Promote and share your business plan. One thing we can guarantee is that a possible investor will want to review your business plan carefully and know that your business meets investment criteria.
- Conduct thorough due diligence. Expect investors to review your financial statements, corporate governance backup, management team members and the products and services you provide.
- Discuss and agree on the terms of the funding. When you have people that desire to invest in your business, the logical next step is a contract which defines terms and conditions of the investment.
- After a venture capitalist and you agree on the terms and conditions, you will get your money. Remember that the venture capital fund you work with be actively involved in practically every facet of your company. Of note is the fact that venture funds ordinarily come in “rounds.” Your company will have milestones and when you meet those milestones, additional rounds of investment funds are made available; this is done with adjustments in price as the business executes its plan.
Create a Crowdfunding Campaign
A relatively new trend is to raise funds via crowdfunding. Crowdfunding raises money for a company from a large amount of individuals (called crowd-funders) who, instead of getting a share of ownership, get incentivized to donate on the premise that they will get a “gift” from your business. This gift could range anywhere from getting their names in credits to personally meeting the business owner to the product your company intends to sell. Please note that crowd-funders are not considered investors and do not anticipate any monetary return on their money.
Crowdfunding has many positives because it offers basically no risk at all to company owners. And, like self-funding, business owners maintain complete control of their business and, should the respective business fail, owners are under absolutely no obligation to compensate crowd-funders. Each and every crowdfunding campaign has its own distinctive qualities and legal and financial obligations run rampant. This is another area that your CPA can assist you with.
You do not have the option to not fund your business- you must somehow collect money so you can get your startup off the ground. Whether you garner these funds via self-funding, a bank loan, venture capitalists or a crowdfunding campaign, you will need the guidance of an experienced CPA. Thomas Huckabee, CPA of San Diego is a full-service accounting firm and can answer all your questions pertaining to funding, and more.