As part of our series on the financial aspects of business, we recently covered the tax basics every small business should know. This time we look at the one factor that unites every business, big or small: capital.
As an entrepreneur about to step out into the world of business ownership, or even an existing business wanting to grow, securing funding is a challenge everyone has to face.
Because different funding options will offer different opportunities, you’ll need to decide on what is the right fit for your business. Here’s a look at seven funding options.
1. Bank loans
Depending on how much capital you’ll need, the best place to start is with your bank. Most banks offer finance through business loans. These can be secured (requiring collateral) or unsecured (no collateral required.)
Essentially, the bank is extending you a line of credit, which you’ll have to repay over a period of time with interest.
Tip: It’s easier to be approved for a business loan if your company is already operational. Having an existing purchase order is even better.
2. Government grants
Unlike a bank loan, you don’t need to repay a government grant. But this doesn’t mean you’re getting money for free – you’ll need to follow a very strict and lengthy process that may only result in partial financial funding.
When applying for a grant, it’s important to find and contact the best department for your business. They don’t work together, so they won’t refer applications to one another.
Tip: You can find more information about the types of government grants available here.
If you don’t have any outside investors, you may need to use your personal finances – i.e. savings – to fund your business in the beginning. This is known as bootstrapping and a number of big businesses like GoPro, SurveyMonkey and Spanx got started this way.
5. Venture capital
A venture capitalist is an equity investor, whose main focus is to make money. They usually look at businesses that are built for growth and will provide good returns on their initial investment. Typically, they want to sell their shares in around five years for 10 times what they initially paid.
Tip: You can find a list of venture capital firms here.
6. Angel investors
This type of investor isn’t financially motivated and is often a friend, family or mentor who gives a one-time investment to help get a business up and running. Angel investors usually get involved during the early stages of startups and their investment is in exchange for ownership equity.
Tip: Have a look at the Angel Investment Network, which makes it easier to connect with potential angel investors or entrepreneurs.
7. Business loans
Existing businesses that require additional cash flow have the option of approaching business loan providers such as Retail Capital. Certain loans don’t require collateral, but do require that your business meet certain criteria such as a minimum trading period and turnover.
Tip: Always read the terms and conditions and funding requirements first to ensure your business is applicable before applying.
Before you approach funding providers
Take the time to do your research properly before approaching a potential investor or lender and ensure you can adapt your business strategy to meet their demands or expectations. They should also have a clear view of what you intend to use the funds for.
We asked one of our valued clients in the financial arena for their expertise on what to do before approaching funding providers.
“Be clear on what you want to do,” advises Lou van Niekerk, director of TripleBar business direction. “You might have a lot of big ideas but when applying for funding or soliciting investment it is important to have a clear, concise and focused proposal or presentation. This approach enables the institution or investors to quickly ascertain the risk and reward of what you are asking money for.”
As important it is to be clear on your objectives, Lou says it’s equally important to stick to them. “It is easy to start veering off on tangents when you get going in business but it is essential to know what your objectives are, to plan on how you will achieve those objectives and to stick to your planning.”
Getting professional assistance in the early days is key. “Ensure that you speak to an accountant to assist in translating your objectives into a cash flow projection. It will not be possible to determine exactly how much money you need if detailed thought has not gone into defining the project scope, its timelines and its deliverables, concludes Lou.
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Image source: Getty