Which Type of Funding is Best for My Business
Funding For My Business Ideas
When determining where to begin the search for startup funding, your first step should be to determine how much you actually need and how much you could potentially use. This is because different amounts require different funding sources. Once you realize how much you need, then it is time to start looking at where you can find the money.
Grants are one of the best ways to acquire startup funds because you do not have to pay back the money. Finding and applying for a grant, however, takes some time and careful thought. Applying for a grant requires an extensive proposal that details every aspect of your business plan, says Forbes. Grant providers understand they are funding a risk, and they need to put their limited funds into an operation with solid odds of success.
Lenders cannot afford to fund ventures with a poor chance of success. Your idea may be “great,” but banks don’t trade on ideas. Lenders are making a capital investment with the intent to make a profit on that investment. By their very nature, startup business loans are higher risk ventures. Because of this, they will often come with more strings and tighter qualifications.
Your best position as the borrower would be to enter the scenario with good credit and a solid business track record, particularly in the industry into which you are venturing. However, startups with little or no practical industry experience are funded every day. A detailed business plan with realistic projections is the absolute basic requirement. Your odds of achieving approval will also depend on the type and amount of the loan required, the industry, the specific lender standards and potential collateral you can offer.
If you are disabled in any way, you may be qualified for a program that will provide you with startup capital for a business. There are also classes and counseling available. This can be useful for learning the ins and outs of the business world. Classes and counselors can help you to make a business plan as well as find areas where you could expand your ideas. Find out if you qualify by visiting your state’s Vocational Rehabilitation Agency.
The SBA’s Microloan program is a great way to get some money to start a business. Local, non-profit community lenders provide the loans in amounts ranging from $10,000 to $35,000. When the program was started, loans didn’t require collateral. Now, however, most of them do in some form or another. More information can be found on the SBA website, says Inc.com.
Most angel investors are interested in businesses that have been established for a while and have a good track record. However, if you have an innovative idea, you may be able to interest a person in your community to invest in your business. Make sure to offer a concrete business plan, and present as many details regarding your startup as possible. Forbes saysthat angel investors want to have some idea of how their money is being used, so make sure that you provide regular updates.
Bank Loan/Venture Capital
Securing a bank loan can occur in the later stages of growing a business. This is because the bank where you are applying for a loan will require several years of financial records. Collateral will be needed to secure the loan. According to Forbes, the best way to get this kind of loan is to engage with the bank early on, before you are ready to even consider the loan.
Open a merchant account, credit cards, or a checking account. This allows the bank to become familiar with the company over time and makes it easier to get a loan when it is needed. Venture capital loans are often necessary for companies experiencing rapid growth and needing tens of millions of dollars to expand into new markets right away or create new products.
Crowdfunding has become a popular way for startups to get funding. This is not the most reliable way to get your hands on some funds, however, because this method relies entirely on popularity and the willingness of the public to give. Many businesses have found great success with crowdfunding, but others have come up dry. Business News Daily says that crowdfunding can be an easier way to get financing because it pools the smaller contributions of many investors rather than forcing the business to look for an investor willing to contribute the entire sum.
Sites such as Kickstarter and Indiegogo are also great for getting an idea out there so that more people are exposed to it. More exposure means more potential investors and more funding. Consider using perks for people who contribute a certain amount. This gets peoples’ attention and encourages them to invest since there will be a more immediate return on their contribution.
Sometimes, a larger company does not have the time or manpower to research and develop projects that do not have a guaranteed market. These large companies often look to smaller businesses to do this work. Apple is a great example. In 2007, a small software development firm began working on a virtual personal assistant. They did not have the capital to market their work, but Apple did. Apple bought the project and incorporated the personal assistant, called Siri, into the next release of the iPhone.
Siri is now one of the most recognized features of iPhone and something other phones are trying to emulate. Business News Daily says that this is a perfect example of how strategic investing can help smaller companies. Businesses that can provide a service or product to larger companies can often get investing from the larger company.
Asset Based Financing
Asset based financing means that you will be borrowing against things that you already own. Equipment and inventory are common assets that you can use for financing, and Startups.com says that you can even borrow against invoices. This is particularly useful for a company that needs cash flow to grow fast but has to deal with long payment terms from customers. The downside to asset based financing is that you will need to pick the financial institution you plan to work with very carefully. You don’t want the reputation of your business to suffer because customers are constantly being hunted down to pay outstanding invoices. This can be very damaging to reputation equity and the customer experience.
No matter how perfect your pitch and how solid your business plan, sometimes you just can’t qualify for a bank loan. There are many factors that go into the bank’s decision, and falling short in one small area can cause you to be denied the funds that you need. This is where alternative lending comes in. Social media and the rising popularity of ecommerce made it possible for Internet companies to offer an alternative to bank loans.
While banks look at the creditworthiness of the business owner, alternative lenders look at other factors such as cash flow and timely bill payment. This can mean the difference between getting a loan and being denied.
Alternative lending has many advantages such as making it easier to get a short-term loan, an easier application process, and a quick decision as to whether or not you qualify, but there are also disadvantages. Most of these loans have very high interest rates, often exceeding thirty percent. This can make it easier to fall into debt or default on the loan if the business is not as successful as anticipated.
Success in business begins with preparation, persistence and pitch. You need to know what you are doing, where you are going and why it will be profitable. A “good idea” is not enough. You need hard numbers that prove you understand both the business and the market for that business. And you need to understand you probably won’t get funded in your first presentation, but if you are dedicated you can find funding for a solid idea backed by a well-developed plan.
Finally, you need to understand that, at some point, all business boils down to sales. How’s your pitch? Can you clearly and simply describe what you do and why it will be profitable? In real terms to real people? Investors and corporate funding sources understand exactly how real their money is. As a business prospect, you need to live and breathe that reality too.
But if your plan is solid and your pitch makes sense, there will be a funding source out there to get you started. From there, it’s up to you to make as much money as possible for all involved.