Starting a new business can be an exciting and rewarding experience, but it often requires a significant amount of money to get off the ground. Fortunately, there are many ways to raise funds for your new business. In this article, we will discuss some of the secrets to funding a new business.
Develop a Solid Business Plan
Before you can start raising funds for your new business, you need to have a solid business plan in place. Your business plan should include a detailed description of your business, your target market, your marketing strategy, and your financial projections. Having a well-thought-out business plan will make it easier for investors to see the potential of your business and will increase your chances of securing funding.
Seek Out Investors
One of the most common ways to fund a new business is by seeking out investors. There are many different types of investors, including angel investors, venture capitalists, and crowdfunding platforms. Each type of investor has its own set of requirements and expectations, so it’s important to do your research and find the right fit for your business.
Consider Small Business Loans
Another option for funding your new business is to apply for a small business loan. Many banks and financial institutions offer small business loans with competitive interest rates and flexible repayment terms. To increase your chances of getting approved for a loan, you should have a solid business plan in place and a good credit score.
Look for Grants and Awards
There are many grants and awards available for entrepreneurs and small business owners. These grants and awards can provide you with the funding you need to start your business without having to give up any equity or take on debt. Some common sources of grants and awards include government agencies, non-profit organizations, and private foundations.
Bootstrap Your Business
Bootstrapping your business means funding it with your own resources, such as personal savings, credit cards, or loans from friends and family. While this approach may require more sacrifice and risk on your part, it can also give you more control over your business and keep you from giving up equity or taking on debt.
Conclusion
Funding a new business can be a challenging process, but with the right strategy, it is possible to secure the funds you need to get your business off the ground. By developing a solid business plan, seeking out investors, considering small business loans, looking for grants and awards, and bootstrapping your business, you can increase your chances of success and achieve your entrepreneurial dreams.
Video Transcription
How to raise funds to start a new business? Imagine you are a business owner and you have a great business idea, but you need money in order to get that idea off the ground. Maybe it is money to buy software. Maybe it is money to develop an idea and get it patented. Maybe it is just money to get everything started.
Some businesses, you can bootstrap, which means you basically pay for the expenses all on your own as you go. But a lot of businesses require money from somewhere, a sizable amount. So the question then is, where can you get that money? Well, quite simply, you can either get a gift, a loan, or an investment, and we will talk about those three categories and then the different types of gifts, loans, and investments.
So first off, with a gift. This is pretty simple. A gift is usually something from a family member. Usually, it is tax-free. You do want to have it documented. But we are going to set that option aside for now because most business owners, if they had the option of a gift, they will take it. The biggest concern is how do I borrow money or how do I get other investors?
All right, so the next question, how do you start a business by getting a loan? There are a few different loan options. You can get a bank loan that would include SBA loans or small business administration loans. These are backed by the federal government. They are usually offered by a local bank, and you can get a pretty competitive interest rate because the government is guaranteeing that if you default, the bank will get reimbursed a percentage of the loan from the federal government.
So bank loans are one option, but there are risks with that. The biggest concern or risk is the interest rate. It could be high. And of course, you often can’t just get the business loan for your business. You have to sign a personal guarantee. That means you are personally liable to make sure that loan gets repaid. If your business doesn’t, the bank can go after you. That is what personal guarantee means.
All right, well, maybe you want to get a loan from someone besides a bank; typically, the option is friends or family because most strangers don’t want to invest in a business they have never heard of or with a business owner they have never heard of. So you then go get a loan from a friend or a family. Sometimes, it is a loan from a parent, and so you simply write, on a napkin or on an email or a quick sheet of paper, the loan is for this amount. Why does that matter? Well, sometimes parents have multiple children, and they are giving a loan to one of the children, and they want to make sure that that loan is documented should they pass away so that it still would be repaid to the estate, which then that money would be divided evenly among the various children.
Alright, so we are talking about how to get money when you are starting a business. We covered gifts. We covered loans. The third area is investments. There are no other ways than gifts, loans, or investments.
All right. What kind of investments are possible? Well, first, you might bring in other founders, other co-owners with you at the beginning of starting the company. They may bring in money. It is pretty typical for a company to have one founder, one owner who has an idea and is willing to work on the business. And then you might have another owner who brings in the money. Now, so they don’t have to give the same amount of money, and you, as owners, can figure out what ownership percentage does each person get.
For example, one owner might give a hundred thousand dollars. The other owner, contributes labor or ideas. They might split the company 50-50, but it also could be 90%, 10%. So you have the option to figure out what that looks like. Okay, so one option of bringing in an investor to get money for your business is a co-founder.
What are the other options? Venture capital is technically another option. Venture capital is a large fund of sophisticated from a sophisticated investment management company that will invest in small businesses, but usually, they don’t invest in brand new businesses with people they have never heard of. So for most small businesses, venture capital is not a viable option.
The next potential option is an angel investor. An angel investor might invest a few hundred thousand dollars. This is a person with money who likes to invest in small businesses where they get to know the owner, and they may lend some help and advice to get the company going. Angel investors are a great option when they work, but usually, you have to have a really good idea and a pretty good resume in order to get an angel investor to lend their money to you. And then, as you can imagine, the angel investor has a lot at stake here. So angel investors want to stay involved, so they can be a little bit intrusive, can be a little bit annoying.
The founders I have worked with who have angel investors say the angel investors always asking me questions and always wanting financial reports, and I am trying to do business, I am trying to grow this company, and the angel investors always coming in saying, “Why don’t we do this? Why don’t we do that?” So it can be annoying.
Another option for investors is crowdfunding. So here is what crowdfunding is: certain states have permitted average middle-class Americans to invest small amounts of money in a business. It might be $500; it might be $10,000 or $50,000. But the idea is that these crowdfunding investors are not regular investors. They don’t have significant money. But they are interested in putting in a small amount of money into a neat company idea. In my experience, crowdfunding works great for restaurants, for the types of businesses that get communities excited. Often, that is a geographic community, so, like, businesses within 10 miles might invest in an event center, for example, so that they have a spot for events or maybe a brewery. It is another popular option for crowdfunding. That is an example of geographic community.
But you might have another type of community, an online community that is passionate about a cause or a game. So, for example, with crowdfunding, you might have an author who wrote a book, and they then offer a game version of that book, and it is crowdfunded. In other words, the money to develop that game is contributed by fans of the book.
So those are options for investing. And to recap, it is co-founders, other people who come in and they just lend money when you are starting the business, venture capital, angel investors, and crowdfunding.
Now, there is one other category that you might be wondering about. What about Kickstarter? Well, Kickstarter is probably more in the category of bootstrapping. In other words, funding yourself. And here is why: the Kickstarter model generally is where people will pay money to you in exchange for some sort of benefit, and that benefit might only happen and you might only get the money if a certain threshold is met.
So, for example, to start a Kickstarter campaign, you might say, we want to raise $10,00. And if we can raise that $10,000, then everybody who pledged that money, that money goes to the founder. And then once that money is raised, it will be used in a certain way as designated by the founder, and the people who pledged money and paid that will get some sort of perk. Sometimes called a founder’s perk, and those perks might depend on how much money was pledged or given, but it is a way to help small businesses get started or have a cool idea developed. But often, there is some degree of. Charity or philanthropy on the part of the investors because they might invest money, but technically, they are just getting a small token gift in exchange.
So the reason that Kickstarter generally falls into the category of bootstrapping is because you only get the money if you have raised enough funds in the Kickstarter campaign, and then you have a contractual obligation to pay those people who contributed money some sort of gift. And technically, it is not a gift; it is a payment for goods or services. So Kickstarter really is not investors coming in. It is more of a contract with people who will contribute money. But the contribution only goes through if you raise enough money.
All right, so there you have it. These are the different ways to raise money for a small business startup. I am Aaron Hall. I am a business attorney. I represent entrepreneurial companies and business owners. If you are interested in more videos like this, you can follow me on the YouTube channel where I create educational content like this to help you avoid legal problems, to help you have identify questions to discuss with your attorney, and ultimately to help your small business achieve success. You can also follow me on other channels.
Thanks for joining me today. By the way, if you would like exclusive content like this, educating you on issues that cause the most problems with small businesses, you can go to aaronhall.com/free. There, you can sign up and get a PDF that lists the most common mistakes made by new business owners, and then some subsequent videos and walking you through on how to avoid those problems. Thanks for joining me here today.