So you’ve decided to start a small business? It’s an exciting time and it’s going to require all your commitment to make it a success. But remember that it doesn’t have to be funded solely by you, or by way of a bank loan.
If you want to ease some of the financial strain of starting a new small business, then there are other routes to funding – including investors and lower interest rate loans.
Here we’ve compiled five great ways for you to inject cash into your small business, without putting all the weight on your shoulders.
ROUTE 1 – FAMILY AND FRIENDS
Possibly the simplest way to raise cash, talking to family and friends is a great starting point. Explain to them what your business is all about, and why you’re so excited about it! Whether you ask them for a loan or to invest is up to you, but there are advantages to both.
A loan is extremely simple to operate. Your family and friends lend you money, and you repay it to them over an agreed time period and at an agreed rate of interest.
Asking friends and family to invest means that they share in some of the business risks and rewards with you. One advantage of investing is that you may be able to secure more cash up front – and of course you do need to make repayment instalments, you simply share the profits according to how much has been invested.
However, just because friends and family might be the easiest people to talk to, don’t be too casual about it. Remember that you’re asking them to make a sizable financial commitment, so pitch your business just like you would to any other potential lender or investor, and make sure they are fully aware of the risks as well as the rewards.
Remember as well that the fortunes of your business may now have a direct impact on your personal relationships. Talk up front about what will happen if things don’t go to plan.
ROUTE 2 – SMALL BUSINESS ADMINISTRATION LOAN
The SBA (Small Business Administration) is a US government agency set up in 1953 to help small businesses.
The SBA does not make loans. However, they do have a pool of approved lenders which you can search on their website; and under certain circumstances the SBA will guarantee loans, giving you the advantage of extremely competitive interest rates and repayment terms.
You can visit the Small Business Administration’s website at
www.sba.gov. As well as their lender register, you will also find helpful information about planning, launching, managing and growing your business. The SBA also offers free online courses.
ROUTE 3 – PRIVATE INVESTORS
Private investors fall into two main categories – Venture Capitalists and so-called Angel Investors. Both will inject cash into your small business in exchange for a share in your business.
Here’s how they operate:
Venture Capitalists
Typically speaking, venture capitalists work with businesses that already have a track record and are looking to expand or move into a riskier venture. Rather than putting their own money into your business, they will set up a fund which others invest into, pooling the resources of multiple investors.
Venture capitalists generally deal with fairly large-scale investments, often into millions of dollars.
Angel Investors
We’ve all seen Shark Tank, right? Angel investors are high net worth individuals who are looking to invest not just cash but their own skills and experience into a business. Securing an angel investor usually means you’ll get all your funding from just one source. However, these are savvy business individuals, and they will only invest in the most robust opportunities, and expect a similarly robust return on their investment.
Angel investors will be using their own capital to help you, and consequently they will own shares in your business. They will also likely want to participate in the management of your business and its development.
ROUTE 4 – RELEVANT BUSINESS AND SCHOOLS
If you already have connections in your field of business, then they can be a great way of finding willing investors. They may not wish to invest themselves, but as your network widens, so do your chances of identifying and persuading those who do.
Of course building and working these contacts can be time-consuming. It’s likely you’ll need to do a lot of networking, possibly even attending industry events, seminars, business breakfasts and the like … but if you commit the time and effort the rewards can more than justify the input required.
Beyond the direct world of business, it’s often possible to reach investors by way of schools which offer training and qualifications in your particular field. Very often the teachers and professors at these schools have served time in their field and are well connected within the industry.
ROUTE 5 – CROWDFUNDING
Crowdfunding itself is not a new concept. From taxation to war bonds, crowds have funded ventures for a very long time. However, the development of online crowdfunding platforms has accelerated over the last 20 years, and in 2015 more than $34million was raised worldwide by crowdfunding.
Here’s an example of how crowdfunding works:
In his spare time, Bob – owner of Bob’s Hardware Store – has been developing a new laser sight that will make both commercial and domestic construction projects faster and easier. He anticipates that when the laser sight launches next year it will retail for $79.99.
Bob sets up a crowdfunding page online. In exchange for an investment of $50, Bob offers a free laser sight when the product launches. For an investment of $100 dollars, he offers a free laser sight and a set of handy DIY tools.
Each investor is set to receive a great “gift” in return for their investment, and because Bob will be giving away products at cost, it’s a deal that works in his favour too.
Not all crowdfunding investments require repayment. Depending on the field of your business, many funders will inject cash just to be part of something that works for the greater good. Health products, environmental initiatives, educational products and programmes that help those in need are examples where “donation-based crowdfunding” is often very successful.
Another form of crowdfunding is “debt-based” or “peer-to-peer” lending. In this format, funding applicants complete an online form and a peer-to-peer lending facility gives them a credit score, which potential investors can use to make an investment decision.
Debt-based crowdfunding investors receive a monthly return with interest. This means that they do not own a share in the businesses they invest in. The system works very much like a bank loan, but with the benefits being that the recipient of the investment pays a lower rate of interest, while the investors receive a higher rate of return than they would do by depositing their money in a bank. Currently though the US government does not protect money invested via peer-to-peer platforms, and so there is a higher degree of risk for the investors.
The final type of crowdfunding is known as “equity crowdfunding”.
www.OurCrowd.com is an example of an equity crowdfunding platform, where investors inject capital in return for shares in a business.
Equity crowdfunding generally deals with larger-scale investments (usually starting in the thousands of dollars) and while investors can expect a higher rate of return they are also subject to greater risk as these investments have no guaranteed return.
What do Investors Look for in a Small Business?
Investors consider a wide range of factors before deciding to inject their money, or their expertise, into a small business. Typically, they will consider things such as>
- Whether the business idea is unique or has unique features
- Whether there is a strong and sensible business plan
- Who is behind the business and what experience do they have
- Whether the business is currently profitable
- What expenses are involved and how they are being covered
- What the financial projections are
- What metrics are used to measure success
Above all, investors want to be confident that they can get a return on the money they put into a business.
What is a Fair Return on Investment?
It’s impossible to put a single number on this. Generally speaking the amount of a business’s ownership that is given to the investor relates closely to how much they invest, but there are many other variables as well.
Bear in mind though that the projected return has to be “worth it” for the investor to consider making a financial contribution. If returns are too low, it’s simply not worth risking the potential loss of the invested capital.
Billwaze 