How to finance your small business start-up

It all starts with a great idea, an idea that has probably been on your mind for a long time. You have the product figured out, how are you going to deliver your service, where are you going to establish your office and how are you going to market your new business. But the hurdle always seems to be the funding to get you started.

Finding financing to start a small business is a major problem for any potential small business. Some startups lend themselves to very little start-up capital because the main selling point is the skills and knowledge of the owner, eg consultants, web designers, public relations specialists. Businesses that require inventory, plant and equipment, and other investments face the real challenge of getting start-up financing.

So what sources can you tap into to ensure your business gets off to a strong start?

your savings

The first port of call! If you’ve been in a job for a while, before going it alone, hopefully you have some extra money behind you. Whether in the form of cash in a savings account or stocks and mutual funds, this is a good start to your fundraising exercise.

You can focus more on saving cash if you’ve had a goal of setting up your own business for a while. Knowing what you need to save to get your business off the ground will ensure that you don’t spend your future savings on unnecessary items. While a new plasma TV or the latest DVD recorder may seem like an essential purchase, knowing you have a business to establish in the future will be enough of a deterrent to keeping your checkbook well guarded.

keep your job

Some business owners are lucky that during the early days of the business they are able to hold down the day job while working the business nights and weekends. This has two benefits. First, they are still earning, which allows them more time to build up a cash reserve. Second, it’s an opportunity to test the business to make sure there’s a market.

Make sure you can realistically keep both balls in the air at the same time; otherwise, you will end up doing neither your job nor your new business justice. The support of your family is also essential to follow this strategy. They have to accept that what used to be ‘family time’ may have to take a backseat until you decide to focus on the business full time.

family and friends

These can be a useful source of funding for any start-up. If you’ve harbored ambitions of running your business for some time, chances are many of your family and friends already know about your idea. So you need to have an indication of who is for and who is against.

If you haven’t shared your secret wish, then it’s time to get a little devious! If you’re in the early planning stages, start drip-sending your ideas to the key people you think are likely to support you. Tell them your ideas, share your ambitions and goals and update them regularly with your progress. The plan is to sell you and your future business at an early stage.

Once you get to the point where you’re ready to start soliciting contributions, host an Investor Night. Prepare a presentation describing your plans, business, market, etc. Show potential investors what their return will be in appreciation for supporting you.

Invite as many people as you can and promise an interesting and fun evening. Be bold from the start; tell them exactly why they are there, so there are no misunderstandings. After you’ve made your presentation, gather all the names of people who might want more information or even a personal interview with you.

While this group is made up of people who know you and are therefore more likely to trust you, don’t forget that you are developing a very different relationship that can quickly turn sour. Get ready for tough times!

Line of credit or bank loan

Now you’re getting into serious stuff! Getting support from a bank for a new business is difficult, as many entrepreneurs will testify. One smart way is to apply for an unsecured loan while you still have a job. If you’ve planned things well, you’ll know when you’re starting, so a few months before you finish your job, apply for a salary-based loan. Of course, make sure you can comfortably meet the quotas. There is no grace period; You are expected to pay immediately, so your business will have to start turning a profit very quickly.

The alternative is a business line of credit. There is no fixed repayment date, although they will be for periods of 6 to 12 months, and you just have to make sure you stay within the overdraft limit. You will need to write a business plan to present to the Bank that describes your idea and the business.

Release of Mortgage or Equity

With the way home prices have been rising in recent years, the vast majority of people now have substantial equity in their homes. The cheapest alternative to an overdraft or bank loan is a mortgage. The interest rate is lower, and because the payments are spread over a longer period, the monthly payment is lower (although you’ll end up paying more interest in the long run).

The downside to raising cash this way is that your house is potentially at risk. If meeting the monthly payments depends on what the business can generate, then a slow start could cause cash problems. So make sure you can meet the payments even during a lean period.

Credit cards

If you don’t have savings, can’t get support from family or friends, or a bank loan or mortgage, then there are your credit cards! However, while it is easy to withdraw money from your card, be careful! Credit cards are the most expensive form of debt.

They’re ideal because all you have to do is pay the minimum amount, but card debt, as most people have discovered, can be a long-term burden. But, if you need a lump sum of cash to get your business off the ground and you know you can pay it off in a few months, then it’s an alternative source of financing worth considering, albeit a bit unorthodox!

business grants

Business grants are available for specific industries, sectors, and reasons. Grant providers will typically only award a portion of your requirement, so they cannot be used to fully fund a start-up. However, they can be useful in filling a funding gap.

business angels

A popular way to finance a business is Business Angels. These are people, usually retirees or successful entrepreneurs in their own right, looking for opportunities to invest in new businesses.

In exchange for an investment, they will typically seek an equity stake in the business and some hands-on involvement. They will have vast trading experience and are therefore useful people to have on board. You will, however, have to accept an element of loss of control, but that must be balanced against your desire for financing.

Obtaining financing for your new business can be challenging, but there are a number of avenues to explore, and so with dedication and focus, you could soon be on your way to launching your own small business.