Sources of Small Business Funding
Once you have determined how much funding you will require to start your business, decide how you will raise the capital. Choosing the right source depends on what you intend to use the money for, how much you need, what the alternatives are and matching the source of the funds for the use.
To help navigate how to raise money for your business, consider these six steps.
Step 1: Minimize how much you need
Carefully check how much capital you require as lowering the amount makes it easier to raise and can help guide you to the right method. There are a number of things you can do, for example:
- Borrow equipment before buying, leveraging your contacts and network to meet short term needs
- Buy second-hand equipment not new
- Lease rather than buying equipment and vehicles (seek professional advice on the implications, tax and otherwise)
- Limit the number of products at the time of launch to lower start-up production costs
- Use lower cost premises
- Buy only the quantities of materials or inventory that you absolutely need.
If for whatever reason you’re still short of money, bootstrapping your business could be the answer, short cutting your way to starting up. For example, not taking a salary for a period of time, finding friends and family to work in the business (for free), selling personal assets to raise cash and calling in favors from your network.
Step 2: Start with your own cash
Having your own money to invest in your business makes sense. It shows you have ‘skin in the game’ and are prepared to back your business with your hard-earned cash. Common sources include any savings or using any equity you have in any property you own (residential or commercial) as your own money is almost always the cheapest.
Money from friends and family is another way of accessing the cash you need. But it’s not always the ‘best’ money as if the business fails, it can be difficult at the next family gathering.
Step 3: Partner with others
Are there other business owners or companies you could collaborate with? If you wanted to enter an export market, an option is to raise capital to fund the infrastructure you’ll need, while another option is finding an existing business already exporting that you could partner with. A strategic alliance with a partner could be a benefit in the short and long term to both businesses.
Step 4: If it makes sense, borrow the money you need
Ok, yes, borrowing is one of the steps, no surprise here. Discuss your financing options with your bank and other lenders to consider include finance companies, supplier credit or supplier finance. Make sure you’re aware of all the obligations and costs before you proceed
Step 5: External capital
If your new business has a bright future, it’s possible outside investors may be prepared to contribute initial capital.
Angel investors typically seek business opportunities with promising growth opportunity. You can search online for local providers, but often funding will be sourced from local entrepreneurs, councils, corporate investors, incubators and accelerators.
Venture capitalists tend to be investment companies seeking more established businesses.
Step 6: Grants and subsidies
It’s always worth checking out what the government (Federal and State) can offer. This type of funding mostly comes in the form of grants, tax breaks, wage subsidies or loan guarantees.
At the end of the day the best sources of funds are most likely those that free you up to grow your business without excessive costs to weigh you down. Consider a combination of sources of funds to ensure you have enough capital for a contingency fund, so you do not need to seek additional funding immediately after launch.
Finally, consider seeking outside expert help to assess your options, especially if there are tax or long-term debt implications.