Where to find the money in funding a new business?
You (hopefully) have a good idea of how much it will cost to get set up and running in your business model. Should you fund it yourself or raise investment capital? Let’s discuss the options for funding your business.
1. Self-Funded
If you can afford it, it is almost always the best idea to fund the business out of your own savings at the beginning. In doing this, you will retain control of the business, be in charge of your own destiny, and be the rightful owner of any profits (or losses) that may come. Giving away equity in the early stages can become expensive, as your business is not worth much at the beginning and you will likely have to give away a large percentage in return for investment capital. Try to retain as much of the business for yourself for as long as you can.
2. Get a loan
If you don’t have enough capital, you might ask your family for a loan (which you’ll promise to pay back over a set time with interest). This way you keep 100% of the company, and get the access to the cash you need. Bank loans or lines of credit might be hard to find at early stage (before you have proven anything yet), but are also a reasonable option. Try to loan as little as possible, or stage the loan amounts, as you may not need to use all of the capital at once and end up holding excess cash (for which you are paying interest on) unnecessarily.
3. Find a business partner
The next best option may be to find a business partner with capital, this person ideally also possessing complementary skills that will benefit your business. Be aware that having a business partner is a lot like a marriage; it’s a long term commitment and it pays to agree on your direction and goals before going forward. Discussions should be held on each person’s role in the business, expectations, timeframe of the business, and exit plan; these will determine whether you both share the same expectations, and whether or not it is viable to go ahead together. You will want to note these agreed objectives down, as these will form the basis of your Shareholder Agreement which should be drafted by a lawyer and signed before you go into business.
4. An angel investor or seed fund
If you are not able to fund the business with your own capital or a loan, and a business partner is not available, you may wish to seek external funding through an angel investor or an incubator/seed fund. As with finding a business partner, you will need to spend time discussing expectations of the business and clearly defining these in a Shareholder Agreement. Keep in mind, early stage finance is risky and investors are right to ask for a large percentage of the company in return for their capital investment. Giving away any percentage of your business will mean reporting to this party regularly, and will diminish your ownership of the company and the direction you wish to take it. Proceed with caution and ask yourself why you are going into business, and whether you wish to have a long term commitment with your investor.
Time to remind yourself why you are going into business
For most people, the freedom and flexibility of being their own boss and running their own business for him/herself is the reason to start a company. If this is your goal, then you should hold onto the equity of your company yourself for as long as possible; gathering a bunch of investors and capital might sound exciting, but if you end up working for those parties as a minority shareholder your business might start to resemble more of an employment situation rather than an entrepreneurial venture.
- Getting on the same page: A list of helpful questions for investors and business partners
- What is your timeframe for this investment?
- How do you see your exit?
- Do you expect a dividend or repayment? At what stage/s?
- How will the investment be structured? As equity or debt, or a combination?
- What do each party bring to the table besides money?
- What will each party’s job roles be within the company?
- If the company requires more capital in future, how will this be provided?
- Will the investor/partner become a director of the company?
