Starting a new business requires a good idea and enough money to get the ball rolling, but how do you raise that start up funding? If you’ve never started a business before, this can be a daunting task. Fortunately, there is a process to this that makes it achievable if you are committed to your vision.
Starting a business is like building a house. You need to start with a good foundation and build up stage by stage. If you follow these stages without giving in to the temptation to cut corners, getting the funding you need to succeed will be much easier.
Stage 1: Make a Business Plan
So you have a unique idea for a business, you have a vision, and you’re motivated to make it work no matter the cost. That’s a great start, but it’s not enough to get funding.
Most people have ideas for businesses, but not many people take the time to map out exactly how they will succeed. This not only makes it challenging to work through unexpected obstacles, but it also makes it difficult to convince others to buy into the idea. In fact, most banks and investors want to see a business plan before considering a loan or investment.
Writing a business plan is not hard, but it takes some strategic thinking. You will need to consider not only the value of your product but how much it will cost to produce, specifically who your customer is, how much to charge, and what makes it better than other alternatives.
Thinking in these ways is foreign for many people if they haven’t owned a business before. But most communities have small business development centers that would be happy to help you through this process. They will have experienced business professionals who will provide you with formats, offer classes on business development, and ask the hard questions that will help you flesh out your concept.
Stage 2: Decide the Path for Start Up Funding you Want to Pursue
Generally, there are three avenues to obtain funding. You can trade debt for funding, you can trade equity for funding, or you can hope for gifts or grants. You may end up using all three, but knowing what each entails is essential.
Trading debt for funding – This means loans. You can get the start up money you need upfront without giving up any business ownership. You’ll have to pay the debt back with interest, but when you do, you’re done.
Many banks have loans dedicated to small business development. They don’t require a lot of experience, but they want to see that you’ve thought through how you’ll succeed. This is where your business plan is essential. Banks tend to be choosy about whom they offer these loans to.
If you can’t or don’t want to work through a bank, other lending institutions specialize in small business loans that may be better suited to help you start your business. Still, there are a lot of predatory lenders in this category. So it’s essential to do your research and know you’re dealing with a reputable company before you make a deal.
Trading equity for funding – This means investors. Start up investors can come in many forms. Basically, they are people who have money, who believe your company is a good investment. They’ll give you funds to get the ball rolling in exchange for partial ownership in your business and often some management control.
The upside is that you’ll never have to pay the money back. You’ll also have access to the investor’s business acumen, which could be substantial… or not. The downside is that they’ll forever own part of your business, including a percentage of the profits. You’ll have to consult them on every significant business decision. So you have to decide if it’s worth it to you to give up some of your creative control and profits.
Gifts and grants – This is a tough one for for-profit start ups. Most grants are set aside for non-profit ventures. There may be a few available for business start ups. This is especially true for businesses that seek to solve pressing social problems. But don’t expect the application process to be easy. Often they’re pretty time-consuming, and there’s no guarantee you’ll get it.
A gray area here is crowdfunding platforms for start up funding. Kickstarter is one of the best known, but there are others. Often you can raise a considerable amount of money this way fairly quickly. But it doesn’t work for everyone. Many start ups succeed here by offering incentives to donors. So, in the end, this becomes more of a bartering/debt proposition.
Stage 3: Seed Your Business
There are different levels of start up funding when you’re starting a new business. The first step for many companies is seed funding. This is the initial money needed to start small-scale operations that will show your idea can be done – building a prototype, buying your first 3-D printer, and producing your first short film. This sets you up to be able to show investors or lenders that your idea has potential.
Most start ups have a pretty informal way of raising this money. They might self-fund if they can and ask for help from family or friends. This could also be a good use of crowdfunding. Some people have even maxed out a credit card for this, though this is a risky way to do it.
Stage 4: Proof of Concept/Proof of Value
What you do with your seed money is critical. This will be your chance to show that your idea is feasible and that there is a market for it (i.e. it can make money).
If you’ve ever watched Shark Tank on ABC, you know that the most successful entrepreneurs can show that they’d produced their invention, that people have bought it, and that they’ve generated profit. They’ve done pilots, conducted market research, and know the numbers by heart.
One of the first disappointments many entrepreneurs face is learning that their good idea on it’s own isn’t convincing enough to get other people excited. At least not enough to pull out their checkbooks. You will have to do a lot of work on your own before you start to see the big money that will help you make your dream a reality.
Stage 5: Reach out and Repeat
By the time you’ve done the first four stages, you’ve already polished your concept, you know your market and your competitors, you know what it takes to produce your product, and you’ve caught a glimpse of how hard running a business can be.
This puts you in a powerful position when you approach a bank for a loan, a venture capitalist for investment, or even a grant committee for a grant.
But this doesn’t mean it will be a walk in the park. Prepare to approach a lot of people before you get buy-in. Whatever feedback people give you along with the rejection, take it seriously. This may mean going back to the drawing board a few times, but it will only strengthen your cause.
Eventually, if you do all this, the chances are good that you’ll get the start up funding you need. You’ll likely have a successful business if you maintain your passion and work ethic.
Red Ridge Financial can Walk You Through Starting Your Business
For an entrepreneur who’s just wet your feet, securing start up funding can be daunting. Red Ridge Financial has years of experience helping new business owners succeed, and we understand the current business climate and the challenges you’ll likely face.
We have a vested interest in the success of our clients. That means we’ll be at your side to guide you with sound financial advice and flexible terms as you weather the storms to come. Apply now to move your vision toward reality.
