So you want to start your own business do you? Well then, good for you! Making the decision to be your own boss comes with many benefits and many choose the entrepreneurial path because of those benefits. You’ll get to choose what you do, pick your own hours, and decide how things will run. Being an entrepreneur is highly rewarding, there’s no doubt about it. However, if that’s the case, then why don’t more people do it?
Well, one of the reasons would be capital. One of the trickiest parts to setting up your own business is figuring out how you are going to finance it. In some cases, you could probably do it on your own. In others, there is no way you can get your business up and running without some help. That’s why we’ve created this handy little guide to financing your business. Look through the options and see if one (or more) will help you get your business off the ground.
First Things First
The first step you need to take in financing your business is learning how much of a financial commitment your business is going to require. Are you setting up an online business or a physical location? How many supplies and materials do you need? Are you going to need employees right away or are you going it alone to start? Make sure you go through all the possible needs of your soon-to-be business and calculate how much money you will need to get going. Only then can you move on to the next steps.
Debt Financing vs. Equity Financing
Now that you’ve decided how much capital is required to get your business off the ground, you need to decide whether debt financing or equity financing will be better for your business.
Debt financing is defined as “a method of financing in which a company receives a loan and gives its promise to repay the loan.” If you want to finance your business this way, often the bank or lender will require some sort of collateral before loaning you the money. This could be the business itself, other business assets, and even personal assets if that’s what you offered. If you can’t pay back your loan, then the lender has the right to seize any collateral tied to the loan. The upside though is that the lender will rarely get involved in the way that you run your company.
Some examples of debt financing include:
- Personal Borrowing:
- This includes borrowing against your 401K, leveraging credit cards, or even taking out a second mortgage on your home.
- Make sure you have a solid business plan if you want to get a loan from the bank.
- Small Business Administration (SBA)
- The SBA offers loan programs for entrepreneurs who may have a hard time getting a traditional loan. They also offer many other resources for those trying to start their own business.
Equity financing is another option for you to look at. This method consists of selling company stock to investors to raise money. This is a good option to consider if you are a fairly young company and don’t have any collateral to offer up for a traditional loan. In addition, you aren’t responsible for the funds if your business does not bring in enough income. In other words, your investors can’t take your home or business. However, the downside to this is that investors can and will share their opinions on how you choose to run things.
Some examples of equity financing include:
- Friends and Family
- They are probably the easiest to get investments from because they likely already support you and your idea.
- Angel Investors
- Private, wealthy individuals who like to invest in small companies. Sometimes for the income but often for the excitement of being involved in something new.
- Venture Capitalists
- Venture Capitalists are more professional and are in it for the monetary return. They will usually buy stock in a company and then sell that stock back to the company or to someone else. While they can give good advice to a new company, they can also be harsh if things don’t go well.
- ESOP (Employee Stock Ownership Plan)
- ESOP’s sell stock to employees in order to maintain control within the company. They help to improve employee performance and motivation but are expensive to set up and maintain. A company must have employees and be in business for three years before being allowed to set up an ESOP.
While debt and equity financing are the most common ways to fund a new business, there is a new method that is growing in popularity. It’s called crowdsourcing. You’ve probably heard of Indiegogo, Rockethub, and Kickstarter. These are just a few of the crowdsourcing platforms available. These organizations tend to offer rewards instead of a financial return. Some of these platforms do not let you finance a business necessarily but rather a project or idea. Depending on your idea, this could be a possible way of financing your business.
Which One is Right for You?
There are many options for entrepreneurs to start financing their business. Make sure you sit down with your lawyer and an accountant to help you figure out if debt financing, equity financing, or crowdsourcing is the best option for you. Once you know what you want to do, go out there and get the financial support you need and don’t hesitate to get your business started.