In business, “cash is king,” as the saying goes. Having sufficient funds (or “capital”) to keep your business going and growing will be critical to your success.
Every entrepreneurial venture is different. But they all need to find funding at some point. Entrepreneurs who work as writers might think they don’t need money to get a freelance career going. Well, maybe they don’t need to buy raw materials. But remember that while you are writing, you may not be earning any other income.
How will you pay your bills until you get enough revenue from your writing to support yourself?
Here are brief explanations of some of the different types of financing that an entrepreneur might use:
You use your savings. You carry and grow your credit card balance(s). You move home (although parental support might more accurately fall under the “friends and family” category of investment below). Maybe you keep your “day job” until you've saved up a cushion and can sustain yourself.
2. Friends and Family
This is when your friends and family contribute money towards your venture. Simply put, if they don’t expect it back, their investment is equity. This means they own a small chunk of your business (usually less than five percent total).
If you intend to pay them back with interest, it's debt. And there are many shades of investment in between those two extremes. If you end up offering stock in your company to the public (called an Initial Public Offering, or IPO), the shares that your friends and family own could be worth a lot.
3. Angel Investors
This is a very common way to find funding for tech ideas and startups. These are qualified investors who have demonstrated wealth (net wealth over one million dollars and income over $200,000 a year). They choose to invest their money in early stage businesses, before other investors or lenders would be comfortable forking over cash.
Their investment is often referred to as “seed” capital (get the analogy?), and may take the form of equity or convertible debt (debt that can be converted to equity). They will most definitely go into the investment with the expectation of ownership and a way to get their money back (with a nice return, if you are successful) via an acquisition or an IPO.
4. Venture Capital
If you're looking to get “backed” by a big-time investor or company, this is for you.
Usually in the form of a firm, these are companies that pool money to invest in businesses they think have a lot of potential. They aren't usually interested until your business has proven its concept and has some revenue.
These folks will become involved in overseeing your business, and they will most definitely get an ownership percentage in return for their funds.
They often provide the funding in stages – you get more once you reach a certain milestone they set in advance. Like angel investors, venture capital folks look for a substantial return through either an acquisition or IPO.
These are funds you borrow, make interest payments over a set period of time, and then pay back.
It's difficult for a new, small, unproven business to borrow from traditional sources like banks.
Even if you have a going concern with a track record of income, your personal credit history will still play a major role in your ability to borrow at all. It will also determine the interest rate you are charged.
If your business is not far enough along to be making money, you may have to look for a personal loan instead. A business credit card based on your personal credit history might also be an option at the very beginning.
If you spend any time online, you have probably heard about crowdfunding. Crowdfunding sites take advantage of social media to help raise funds. This is particularly directed at friends and family, but can cast a wider net as well.
On most crowdfunding sites, you create a profile with information on your company, including a short video, and offer some sort of reward (product or service) in exchange for contributions.
There are plenty of ways to find funding once you decide you're ready to look. How will you fund your business when that time comes? It’s never too soon to prepare for it.