Starting your own small business is always a risk— so make it a calculated one. Raj Tumber, a Las Vegas-based SCORE volunteer mentor through the U.S. Small Business Administration (SBA), says to ask yourself—and answer with brutal honesty—if you invest your own money, or funds from your friends and family and lost it all, how would it hurt you? And would you have enough money saved up to cushion the loss?
Fortunately, there are multiple options to fund your business instead of leveraging your house, your retirement account, or your children’s education fund.
As an entrepreneur who works in security consulting and strategic business development, Tumber says the first place to start is with a solid business plan to get a ballpark figure of how much you’ll need—and for a lot of folks, that’s a best guess that gets tweaked often along the way as the business plan is refined.
Alex Glassey is also a SCORE mentor and president of StratPad, a service that provides cloud-based software for business planning, education, and funding. He says entrepreneurs need to think carefully through their first year of business, create a detailed and conservative cash-flow projection—and most importantly—ask for help. “Look for key individuals who’ve been through it before, who understand your passion and your industry but who also understand what it takes to make a business successful. Learn from their mistakes and their experience,” Glassey recommends.
Next, determine what resources are best for your situation. If you’re looking for a relatively moderate amount of up to $50,000, Tumber says to look into Accion, a microfinance, training and investment nonprofit, or even the U.S. Small Business Administration, to find microloan information. These also may not have as stringent requirements as a regular bank.
Once you’ve settled on the number you’ll need, you also need to evaluate your own stake—your “skin in the game.” The amount of skin you’ll need depends on the bank and what you need the loan for, Glassey explains. Generally, you’ll need to put up about 25 percent, and many banks will only lend against hard assets like land, equipment and vehicles, or a proven cash-flow such as accounts receivable.
Banks can also provide loans, but you need proof of concept, and of course, a tight business plan. “The biggest mistake first-timers make is not being prepared,” Glassey warns. “They forget the old saying, ‘Success comes from 1 percent inspiration and 99 percent perspiration.’ No bank will lend money without proof that things have been carefully thought through.”
It sounds counter-intuitive, but a credit card might be a good way to seed the business with $5,000-$10,000, as long as you can get a low interest rate and pay it back quickly before you get socked with fees, Tumber says. It’s a quicker process than a loan, and you won’t need to show a business plan—it’s a personal screening process and shouldn’t be a problem if you have a good credit score.
Help from Friends, Family and Investors
A lot of entrepreneurs get by with a little help from friends and family who won’t check your credit or require a business plan. But make sure that all agreements are in writing so that there’s no hard feelings—or awkward Thanksgivings—if someone’s misunderstood the terms. Generally, it’s a contract to pay back the money within a certain amount of time and under certain terms. Don’t forget to consider what would happen if the business fails—are you able to have the conversation about losing their money?
“Angel” investors provide amounts from $25,000 up to hundreds of thousands of dollars, and often there are several of them—but they’ll be more invested in the demand for your product than your idea. “They are very professional, and they know what they want,” Tumber says.
Venture capitalists usually use their own money as well as funds from other investors, and also sit on the board and lend their expertise. “They want to have control over how the business is being run,” Tumber points out. “In other words, by the time they are done, by the time your company survives and grows, by the time they’re out, you have actually learned how to operate a business better than ever because you’re working with the experts.”
Crowdfunding Also Demonstrates Viability
“Crowdfunding” or “reward” funding is another way of raising funds—often online through a site such as Kickstarter or Indiegogo—and appealing for money from the public to help start your company. There’s the allure of a return once the company is up and running, and meets its funding goal. Which, says Tumber, should be kept as conservative as possible since money is given back to the donors if the goal isn’t met.
Crowdfunding is also beneficial because it can help demonstrate a demand for your product and it’s an easy way to analyze the competition. In addition, it provides more liquidity to bring to banks and other funders.
Grants and Competitions for Your Business Plan
Watch out for seminars that offer access to “free government grants” for businesses because generally, there’s no such thing, Tumber says. Usually they involve motivational speakers who ask you to pay a membership fee and deliver nothing in return. But what is actually worthwhile is a resource like grants.gov for rural development, renewable energy, and other community-building loans that your business might consider.
Some organizations and large companies also offer prizes and development programs on the strength of a business plan and any promising initial work via entrepreneurship contests and business plan competitions.
If at First You Don’t Succeed
If you’re unable to raise funds for your business and you can’t understand why, you may have to re-evaluate your idea—you can learn a tremendous amount from your rejections and stakeholder feedback.
“Every time you get bounced back, you will learn what you’re missing. From there on, you will gradually improve yourself,” Tumber encourages.