Over the last couple weeks, we’ve shared important initial considerations for businesses, including tips for negotiating their lease and zoning considerations for businesses seeking to open in Detroit. In keeping with this theme, today we share with you 5 common methods that business owners can use to fund their business ventures.
1. Traditional Funding
Oftentimes when an entrepreneur is trying to fund his or her venture, the first place he or she thinks to go in search of funding is the bank. Lending institutions often have specialized options available for small business owners. Credit unions and community banks often focus on investing within the local community, so if your venture might have a positive economic impact on the community, the lender may be more willing to lend you the money. To secure this funding, you typically must have a good credit history or have assets you are willing to put up as collateral in exchange for a loan.
If you choose the traditional funding route, be prepared to present the lender with a solid, detailed business plan, including revenue expectations, market research, and any other information you think will help convince the lender to offer you the money. Even if you do all of this, it’s common for lenders to deem the venture of a first-time business owner too risky and refuse to make a loan, so don’t be discouraged if you are rejected.
2. Venture Capitalists
Venture capitalists are another good option to obtain funding for your venture. Venture capitalists are essentially professional investors in search of qualified startups to fund. They usually work at firms that pool money from wealthy individual donors and use money from that pool to invest in a variety of new business ventures. Venture capital firms provide a potential route to funding for entrepreneurs who would likely be rejected by more traditional lending sources for a variety of reasons, including the relative newness of the venture or its lack of assets. The influx of money provided by venture capital firms in turn provides the company with the potential for rapid growth.
There are also some downsides to working with venture capitalists. For one, venture capitalists often look for businesses that are somewhat established, making this option sometimes out of reach for newer startups. In addition, venture capitalists often demand significant equity in a company in exchange for their investment. The earlier you are in the investment stage, the more equity the venture capitalist is likely to demand in exchange for his or her investment. If you are weary of giving up control of your business, this might not be the best option for you.
3. Angel Investors
Another possible way to fund your business venture is through an angel investor. An angel investor is a wealthy individual who (most often anonymously) uses his or her own money to back startups and young companies. Angel investors have helped fund a number of companies that have grown into household names, including Google, Yahoo, and Costco. Like venture capitalists, angel investors aren’t writing blank checks. Angel investors oftentimes want equity in your company in exchange for their investment, as well as to see tangible progress in your venture.
Angel networks are great opportunities to pitch your business idea to numerous prospective investors. It helps to find an angel investor that has knowledge of your industry and your business model so they can offer mentoring, strategic experience, and other substantive advice and assistance as you work to launch your venture. Websites like AngelList and Gust are good resources to start searching for potential angel investors in your geographic or industry area.
4. Friends and Family Members
Another way to obtain start-up funding for your venture is through the help of friends and family. Borrowing from a friend or relative is often a good alternative to more traditional forms of financing. For one, your friend or family member probably knows you better than most, and will likely be more willing to invest than someone who does not know you at all. Also, your friend or relative might be willing to offer you low- or no-interest payments, allowing you to avoid the hassle of bank contracts while also saving money in the long run.
This option can also pose obvious risks. It’s not always easy to mix personal and professional relationships, and accepting funding from a friend or relative always brings with it the possibility of damaging that relationship. To avoid the potential for such issues, it is very important to initially approach the friend or family member in a professional manner, let that person know there is always a risk in investing in a startup, and let the person review your business plan to know you’re serious and prepared. If the person agrees to provide you a loan, be sure to structure the funding in terms you are both comfortable with, and make a point to keep that person well informed on how the business venture is progressing in the future.
5. Invest Your Own Money
Today, around 90% of all startups are self-funded, which is also known as “boot-strapping.” There are clear advantages and disadvantages to using your own money to fund your venture. It takes time and a lot of planning to save enough money to fund your own venture. Also, it’s risky to put your own personal financial well being at risk to fund your startup. However, one advantage to doing so is you don’t have to give up any equity or control in the business to an outsider. In addition, putting up your own money might show other potential investors that you are serious and confident in your idea, making them potentially more confident and willing to invest in your venture where you’ve got your own skin in the game.
Bonus: Crowdfunding and Contests
A relatively novel option for businesses seeking funding is crowdfunding. Crowdfunding websites, such as Kickstarter and Indiegogo, provide entrepreneurs with a platform to pitch their business venture directly to the public. With certain sites, you can keep the money you raise even if you don’t meet your funding goal; for other sites, you need to meet your goal or you get nothing. Keep in mind these sites often have steep transaction fees, ranging from 5-10% of the total amount raised.
Another option is to enter a competition that provides cash to the winning business idea. In Detroit, for example, a popular contest is Hatch Detroit. With financial support from Comerica Bank and the Detroit Lions, Hatch Detroit offers a $50,000 grant to help an entrepreneur launch their business venture in the city. Since its creation 5 years ago, Hatch Detroit has helped launch a variety of businesses, including restaurants, breweries, bakeries, coffee shops, retail stores, and more.
These are just brief summaries of a few of the many methods you can use to fund a startup business venture. Recognize that there are pros and cons with all the above options, and all funding decisions involve hard work, dedication, and commitment on the part of the entrepreneur seeking to fund his or her venture. If you are an entrepreneur seeking to launch a new business venture, the attorneys at Dalton & Tomich PLC have extensive experience in all stages of business formation and development, including funding. Feel free to contact us to see if we can help make your vision a reality.