There’s a saying, “scared money doesn’t make any money.” Well, how about, “no money means no money.” So the basic question to starting a business is: how do you get funding?
There are several ways to acquire funding for your business. Some ways are traditional and others are creative. Each one will have different requirements and eventually different commitments from you. A few of those options are below.
Family Funding – Most entrepreneurs are expected to start with cash investments from their savings. If they can’t fund their business personally, then they are expected to initiate what is typically called a “friends and family round.” In this round, friends and family are expected to give money to your venture with the promise of a payback with interest or ownership in the business. It is usually the former. However, for people of color, there is a huge disadvantage economically, and they may not always be privy to this round.
Loans – The most traditional business funding source is a business loan. Most banks will ask to see a business plan. If the company has started then they will ask for financial documents. There are several types of business loans. My preference is to go through the Small Business Association (SBA) because they are much friendlier to small business owners. Some banks even administer SBA loans. Typically, bank loans will have an interest rate and terms for repayment. When applying for a business loan, be prepared to show the use of those funds and how the loan will be paid back to the lender. It is important to demonstrate this or they will not consider your application. Also recognize that you may be required to prove that you have a significant amount of equity or assets in order to be considered.
Investments – Due to the boom, the rise of venture capitalist investing into startups has been how many technology firms have bypassed traditional banking loans and acquired funding. Investors tend to be risk takers and will consider innovative disruptive tech companies, especially in emerging markets. They also invest larger amounts. As part of the deal for an investment, a company will give a percentage of its shares/equity to the investor or investment firm. If the company goes public, they will also be granted stock options. Though investors tend to be open-minded about funding startup companies, they too will want to see financials as well as how the funds will be utilized. They may be extremely lax about equity; however, they will expect some percentage of ownership.
Crowdfunding – The newest investment opportunity for funding a business has been crowdfunding. Think GoFundMe. These platforms allow companies to solicit funds publicly in exchange for a variety of incentives decided by the business owner. Unlike investments or loans, a founder is not obligated to give a percentage of their company or anything for that matter. However, companies that offer incentives, tend to do better. Typically, in crowdfunding, companies can opt to either earn the money once the full amount is reached or to take any earning by a certain date. Although there is no accountability with crowdfunding, ensuring that you get enough backers is the key.
Grants – Depending on the type of work you do; you can apply for grants. Grants can come in the form of a proposal submitted to an organization or it can be a grant from the government. All grants are interest- and repayment-free. However, detailed proposals with financials data showcasing how the funds will be used are expected. Grants can be extremely competitive and take years to acquire. Also, depending on the granting organization, there may be accountability and restrictions of how the funds are used. Typically companies in the science, healthcare, technology and the arts will find funding opportunities from the government. The one caveat is that depending on the grant, the individual or company may have to share creative or intellectual property rights for a period of time. Check out the 2021 Karleen Leveille Entrepreneurship Center Grant Guide and List for a compendium of over 100 grants for a variety of businesses that together award over $2 million dollars in funding.
Competitions – One creative way to earn funding is to compete in business plan competitions, which can be found by searching “Business Plan Competitions” online. Many organizations sponsor competitions to help budding entrepreneurs. Though each business competition is unique, they will often require information about your business, which may come from a business plan. Most recently, a lot of competitions are asking companies to share 30 second to 1 minute pitches about their business via video to compete.
Pre-sales – Although this is not a true funding method, I like that it can help jumpstart a business by getting customers before any supplies are bought. The key is to make sure the margins that you place on your produce and cost of goods sold are significant enough and that you can deliver the product as specified while making a profit. Pre-sales work better on products more than services; however, you can sell services prior to release dates. In this method, you do not have to give a business plan or ownership of your company. However, you do risk your reputation if you cannot deliver. To ensure that you do, stick to a limit of how many pre-orders you will take and once you hit that number, under promise the delivery date and over deliver when you have the goods!
Funding for your business is as creative as you make it. It may involve one of the options mentioned or a combination of several. In fact, entrepreneurs will seek funding several times in their life as they grow and expand. The consistent key is to be prepared, have the right documentation as well as an explanation on how you will use the funds and pay them back. If you can do that, then you are half way to getting your funding!