So, you have a great idea for a business. Now’s the time to start asking yourself some questions about how you will fund it.
Determine if You Need to Raise Money
Do you have enough money to get you started and to sustain the business until you start to become profitable? Some lucky people do, but most don’t. If you are going to seek financing, whether from a bank, private investor, friends and family or some other source, you will need to explain to them what your business is, how it will work, how you will pay them back and how you will make the business grow and become successful. That’s called a Business Plan.
There are sources on the Internet and even software you can buy that will help you create one, and if you are going to seek financing, a Business Plan may not be required by your lender or investor, but having one puts you miles ahead of the competition. But you aren't ready to put one together yet. First, you need to make some more decisions and gather more information.
Find Out How Much Money You Need
The first thing you need to do is decide how much money you need to find. To make that determination, you need to answer a number of questions. Is this a business you can run from your home or do you need a storefront, office or warehouse-type space? How important is location? If you depend on foot traffic, like a retail business or restaurant, you need to know what locations are right for you and how much space you will need. What are the rents like in those areas? What about utilities and taxes? Can you move into a plain, four-walls-and-a-door space, or do you need a build-out? How much will that cost? Are landlords in your area generally willing to contribute to that cost, or give you some free rent during the construction?
And how about employees? Can you do this all by yourself for a little while, or do you need assistance as soon as you open up? How many employees and what kind? How much will they need to be paid? Insurance? Supplies? Furniture and fixtures for your space? These are all items you may or may not need, depending on what your business is, and you need to know that, and know how much they will cost, before you create your Business Plan. You should also determine your need for these things over the first few years of the life of your business. A good Business Plan will show realistic expectations for 2 to 5 years. Chances are you will need to consult with your accountant to make sure the numbers are right and accurately reflect the financial picture you want your potential sources to see.
Where Will You Get Your Money?
So now you have your Business Plan all ready to go. The next step is to decide on just what sources you will seek money from. Do you mind having investors, who may or may not want some say in how the business operates, and who may or may not want some equity interest? Would you prefer (and can you make do with) small loans from friends and family? Do you need larger sums?
There are a number of sources to go to for outside financing. The basic ones, like banks and the Small Business Administration, are easy to find. Those will want to see that you have a significant amount of your own money invested and/or available for future investment. Some may want to see a track record (meaning your business survived on your own money for some period of time and now, as shown in your business plan, is ready to take the next step, but requires an infusion of capital to do it).
Other Sources of Funding
But with a little creativity and diligence, you can find less obvious sources of funding. There are a lot of organizations out there that have funding available for specific types of businesses. Is this a minority-owned business? Does it serve an otherwise under-served population? There are foundations that seek those kinds of businesses in which to invest.
Trade Associations for your industry can also have good leads for sources of financing. You should join the major regional and national organizations for your business (and don’t forget to include their dues in your budgets - they can be expensive).
There are also some smaller venture capital funds that enjoy these kinds of investments. Of course, they expect a significant return on their money and will most likely want equity in addition to a return.
Plan to spend some time on the Internet and at your local library researching the potential sources of funding for your particular business. Some are hard to find, but they’re out there.
- Do you have all the cash or credit you will need, or at least a significant portion of it?
- Will you raise money from friends/family or do you need outside funding?
- Develop your budget and financial forecast.
- What will your cash and credit needs be for the first few years?
- Do you qualify for grants or other favorable funding, such as being a minority-owned business?
- Will you go to a traditional lender like a bank or a different source?
- Research Trade Associations and other alternative sources of funding.
Now go get your money and then make your business go!
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