One of the main difficulties in starting a business is usually related to financing it. A company may have a great business plan and good products, but it will mean little without proper funding.
There are many resources to obtain funding or start-up capital, but each has its limitations. Never forget that successful business practices include fulfilling debt and obligations to investors.
Prepare and add a detailed financial analysis to your business plan to determine the most appropriate financing options for your business.
It is the most preferred financing option. As a business owner, you are solely responsible for your actions, and you do not need to use your profits to pay off debts. So if the investment does not bear fruit, only the business owner will be left without money. Remember not to invest what you are not prepared to lose. It is one thing to lose money or equipment, but it is a different story if you’re at risk of losing your home.
- Cashing out investments or securities
- Sale of part of the property
Friends and family
This option assumes the debt payment from the received profit but does not have the strict conditions as professional lenders who need guarantees or collateral. Friends and family already know you and your abilities and can judge for themselves whether your business plan is sound. While friends or family can be empathetic, if your experience of starting a business fails, it’s important to still stick to your commitments. The risk of losing friends or quarrelling with family is not worth it.
What is important to remember:
- Do not borrow an amount of money that you are not ready to lose.
- Before they invest, ask them how they will react to the situation if your business does not succeed and you cannot immediately or ever return the money to them.
- Determine clear conditions for obtaining such a loan, and if the amount is large enough, contact a lawyer to draw up a contract. In resolving disagreements, it is best to rely on written documents rather than on your memory. Discuss the expected results in detail so that there is no room for doubt or misunderstanding.
Sponsorship and charity
You can create a fundraising or crowdfunding campaign to receive the necessary funds to start your business. This option has become increasingly popular in recent years. Fundraising refers to the process of collecting voluntary financial contributions from individuals, businesses, charities, or government agencies. The task of engaging strangers in funding your business may not be easy. Take time to carefully think over your business idea and how to present it clearly and concisely. You have to convince your potential donors that your idea is worthy of their money.
It is funding received from those who, in exchange for help, will have a stake in the business. This option does not necessarily mean that the investors receive part of the profit, but they will have the opportunity to influence some of the decisions made in the company. With such agreements, it is essential to define expectations clearly to avoid misunderstandings. For example, does a person want to take part in the day-to-day running of the business, or does the person want to remain a passive partner with little or no voice?
Financing through loans
It is the traditional way of receiving funds, in which the business owner must contact a bank or other organisation. It must also meet the requirements. The business owner will then have to make loan payments, which will also include interest.
Types of lenders:
- Financial institutions: Look for companies and banks that provide loans specifically for small businesses. Small business service organisations or associations can be a nice place to find out more information about loan programs in your area.
- Microcredit Organisations: Microfinance aims to provide small loans to those who do not qualify for traditional loans from larger banks. Some microcredit organisations emphasise lending to groups of business people who may lack experience, education, or the ability to provide collateral. Group members pay off the loan together and support each other. They also meet regularly to discuss their business and share their knowledge.
- Public or private associations: They provide loans based on specific requirements. A business may receive funding if it promotes local culture, environmental protection, or animal rights. This type of funding may come from government grants, some microcredit organisations, or resources available in your area. Other factors that may affect obtaining a loan are your income, work in a specific industry, or residence in particular areas.