4 Ways to Get Funding for Your New Business
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When starting your startup, securing funding probably sounds like the least exciting part of business formation. Developing your idea, setting out your goals, and getting clients are all more thrilling parts which help you embark on your journey towards running a successful business—securing funding is the obstacle you have to clear before doing any of this.
While it is a particularly steep hurdle to clear, it doesn’t have to be something you do on your own. Securing funding involves contacting others and bringing people on board your journey towards startup success.
In this blog post on ways to get funding for your new business, we lay out four of some of the most effective ways to help secure you financially and start your business off with a strong financial foundation.
4 ways to get funding for your new business in a nutshell
- Keep your day job until you can comfortably quit, and approach family and friends for donations
- Consider the differences and possibilities between venture capital and angel investing
- Research venture capital firms and interview investors
- Look at all the different types of crowdfunding to decide which is best for you
- Examine the funding programmes and loan offers in your place of business
1. Determine what you need
The first crucial step on your path to securing funding is to reasonably determine how much you will actually need. This isn’t a time to be too ambitious or let your excitement carry you away on how much you hope you can achieve in your venture. When determining how much funding you require, take a sober approach to what you need or risk failure and becoming disheartened.
That said, a survey from Score.org on startups in the US found that 78% of successful startups initially relied on personal funds and income from their other jobs. Which brings us to our first point on determining what you need.
Don’t quit your day job (yet)
There’s a good chance your most reliable source of income is your current job. You can divide up a portion of your monthly paycheque and put it towards your startup fund until you feel confident you have enough to leave. It’s also a good idea to begin your startup as a side-hustle, working part-time on both jobs. This way you can get a feel for the startup life without entirely depending on it just yet.
Approach friends and family
This won’t be possible for everyone, and it may be very difficult for others. Asking for donations from friends and family means more than asking for them to trust in your venture—it means asking for them to follow through on that trust. Family members may tell you early on they’ll be happy to help you out but when it comes to handing over the cash they suddenly become reluctant.
However, there are ways you can better secure your chances for donated capital. While everyone’s family is different, there are certain preparations you can make which would make anyone feel better about forking over their hard-earned cash to help you out:
- Business plan: The more thoroughly laid out your business plan is, the better someone is going to feel about giving you money, because it’s clear you’ve planned ahead—this isn’t just a whim
- Be reasonable with what you ask for: This goes for both asking for too much and too little. You may be initially tempted to ask for a small amount so as to not scare off who you’re asking, but asking for too little could have you needing donations are second time, which shows a lacking of planning to your donors
- Expect their input later on: Your donors not only have put their money into your business, but if they are family and friends, they care about your financial success. Don’t shun them when they ask you how things are going or reject any suggestions they give to help you out
2. Secure venture capital from investors
Obtaining venture capital requires much more planning ahead than seeking funding from family and friends. This is because while donors will choose whether or not to invest in your company by providing feedback or simply checking in, venture capital investors will play an active role, perhaps sitting on your board of directors and making decisions affecting the future of your business. Selecting potential venture capital investors requires a thorough investigation of each person who is going to be involved in your business.
What is venture capital?
First, what exactly is venture capital investing?
A type of private equity financing, venture capital is generally provided to companies with long-term potential for growth. A venture capitalist will take note of any startup if they believe it has a good idea, solid business plan, and they will benefit from being involved.
When venture capitalists invest, they could give money to your company, or professional expertise that would assist you in what your company does. They may also be offering business advice.
The point for venture capitalists is that they want to be involved in your company. So, rather than expecting interest on the money they put in, they will want to be involved in future decisions in your company and be directly impactful on its success. Be mindful that you are giving up a portion of the control you have over your own company when you take on venture capital.
Venture capital vs angel funding
If angel investing is possible, you may want to consider this over venture capital. An angel investor works like a donor from your family, providing money at the early stages of your company but in this case the investor is paying for ownership equity. This means that if your company is liquidated, a percentage of your shares will go to the investors.
The key difference is that an angel investor will not interfere with your decisions as a business owner. They will provide money at the beginning and leave you to run the business in the way you wish, thus providing a more trustful form of investing than venture capitalists who may see problems with your business plan they wish to change.
Securing venture capital
If you’ve decided you want to go about securing venture capital, the first thing you’ll need is a very clear business plan. This is not only to convince the investor, but also for your own sake. The better laid out your business plan is, the clearer you are making the terms of involvement to the venture capitalist, meaning later on you’re less likely to be surprised by the interference of the investor.
The second most important thing for you to do is heavily research venture capitalists and venture capital firms. Answer these questions when doing background research on investors:
- Where have they invested before?
- What kind of involvement do they typically offer to companies?
- Are they interested in new companies or well-established ones?
- What kind of qualifications do they have?
- Do they specialise in your industry or more generally?
- For how long do they wish to be involved with your venture?
3. Use crowdfunding methods
Crowdfunding can be wonderful for business owners—if it’s possible. It’s probably the most difficult form of funding to secure because you’re essentially asking for a large pool of investors who want almost nothing in return. Crowdfunding is more like donation. Score’s survey found crowdfunding at the lowest percentage for ways entrepreneurs secured funding, at 0.8%
That said, there are different methods of crowdfunding which you can implement. Read about the options below to help decide which one fits your situation best.
- Donation crowdfunding: difficult for entrepreneurs without a public following or particularly compelling idea and business plan, crowdfunding is popular for non-profit organisations doing humanitarian work. Donors are more likely to get behind something with no financial return if they believe they are doing something good
- Equity crowdfunding: angel investing with more investors giving smaller donations, with equity crowdfunding you are selling shares to each investor so they would be paid back after the company’s liquidation or if they wish to sell their shares at some point
- Debt crowdfunding: with debt crowdfunding, you are borrowing money from individuals instead of taking out a loan from the bank. This may be best if you wish to have more control over your pay back terms than you would with a bank
- Rewards crowdfunding: favoured by youtubers, instagram influencers, and other public content creators, rewards crowdfunding offers return on investment in the form of merchandise, recognition on the channel or page, extra content, and anything else the audience may find enticing and worth their donation
Crowdfunding and health insurance
4. Investigate small business loans and funding programmes
Depending on where you live, small business loans can be a good and safe way to begin your entrepreneurial venture. They differ from venture capital investors and crowdfunding methods because the terms are set out clearly by financial and governmental institutions, meaning the payback conditions are clear to everyone who takes out a loan and are only granted to those who will be able to afford it.
Looking for fast, easier, and fair funding for your startup? Penta offers you lending options that suit your needs.
In Germany, there are several types of business loans and grants for the hopeful small business owner:
- Direct grants: non-repayable cash payments, direct grants are designed to offset the costs of setting up your business. The size of the grant is usually determined by the size of your business and location within Germany. Read up on the GRW cash grant here
- Public loans: publicly-subsidised programs offered by banks, public loans have low-interest rates. They come in the form of both national public loans and federal state public loans
- Public guarantees: a German government scheme, public guarantees are intended to encourage banks to offer loans to companies. The bank will act as a guarantor for small business owners with insufficient loan collateral and will promise to repay the lender if the owner is unable to. They cover up to 80% of the loan amount.
- Equity capital: lastly, some public sources will provide equity capital to small businesses and in 2016 over 900 million euros was provided to small businesses this way. Some providers include High-Tech Gründerfonds (HTGF), Coparion, and Mittelständische Beteiligungsgesellschaften
What to consider in business financing
While all of these methods provide opportunities for you to fund your venture and start your business on a strong financial foundation, each one comes with risks and things to consider. Below are some of the top things to consider in each of the ways to get funding for your business:
Determine what you need
- Avoid being too ambitious
- Keep your job and consider starting your business as a side hustle
- Approach family and friends with a clear business plan and expect their input
Secure venture capital from investors
- Thoroughly research investors and venture capital firms
- Lay out your terms and business plan clearly to each investor
- Expect to lose some control over your business decisions
Use crowdfunding methods
- Consider all crowdfunding methods
- Use whatever public following you have to help gain funding
- Offer incentives for crowdfunders
Investigate small business loans and funding programmes
- Look at all the business loans on offer in your country of business
- Consider how they differ from venture capital investing and crowdfunding methods
- Present a clear business plan to any government backed or public funding institution
Financing your business may not be the part of running a business you look forward to, but it can ease the process to learn that there are many options for financing available. Spending time to do the research and decide which methods work best for you will enable you to approach it and pick the best financing option for you and your business. Hopefully this blog post has demonstrated the many ways to get funding for your business.
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