So you’ve come up with an idea for a business? Congratulations! Now you need startup financing – that initial infusion of money needed to turn the idea into something tangible. And that’s where it becomes tricky. Today’s small businesses exist in a new economic landscape that forces creativity and out-of-the-box thinking when it comes to financing.
When my business partner and I started our first business, we initially used friends and family until we were large enough to attract more substantial funding from angel investors. The truth is, most small businesses piece together their funding from several different sources phased out over time. No single source of funding is necessarily easier to come by than another. It depends on your business model, projections, and how well you can sell yourself to potential financial partners. Whether you are a start-up seeking initial seed capital or an operating small business looking for money to grow, you have to be flexible, remain positive, and stay vigilant in your efforts.
Here are a few ways to get started with funding your small business:
Do it yourself. Most entrepreneurs and small business owners these days have come to the realization that they will have to self-fund (also known as “boot-strapping”) their projects for a significant amount of time until more formal funding opportunities become realistic. There are many ways to accomplish this from savings accounts, lending groups (‘CHAMAS’) to leveraging other personal assets. If you believe in your vision and have an absolute refusal to accept failure as an option, you should feel comfortable investing your own money into the business. In turn, this will make potential investors more comfortable knowing you have skin in the game.
Friends, family, and fools. Funding from friends and family is a very popular and effective way to round up some initial capital for a business. Those closest to you are more likely than anyone to believe not only in your vision, but your ability to make that vision a reality. One downside of course is that you are potentially risking personal relationships should the business fail and your agreement not be structured properly. To avoid friends and family feeling like “fools” I recommend structuring this type of funding as a high interest loan for one year. Borrow just enough to launch the business into operations, build your website, or develop some additional pitch material if you want to go after big money. And as much as you will want to avoid racking up legal fees, it is imperative that all parties get sound legal advice. Not doing so can potentially cost you much more down the road.
Youth fund. The Youth Enterprise Development Fund was established in year 2006 with the sole purpose of reducing unemployment among the youth in Kenya. It targets young people within the age of 18-35 with objectives of providing loans, facilitating business development services and support the youth. This is another source of funding that you may consider.
Uwezo fund. This fund is aimed at enabling women, youth and persons with disability access finances to promote businesses and enterprises at the constituency level. It also provides mentorship opportunities that you can further exploit to make sure your business is a success.
Small business loans. I know what you’re thinking. Banks are more stringent than ever about giving out loans and if you don’t have any credit, how can you possibly consider this route? Many people have run into this obstacle all the time. However, you can manage if you do the following; have a good business plan, profitable projections and some of your own money in the game. Another reason to pursue debt financing is that you aren’t giving away a piece of your business.
Angel investors. This path is close to my heart because we have achieved enormous success in raising money this way. That being said, much of it has to do with timing and leveraging the right contacts. In our experience the “friends and family” route has actually opened the doors to angel investment rounds. A large amount of trust can be built by giving your early stage investor his or her money back plus interest. But just because someone lent you money to launch your business, doesn’t make them the right financial partner for the long run. When raising money from angels or VC’s you have to keep in mind that they will own a piece of the business and you then have a fiduciary responsibility to act in the best interests of the business and its shareholders
Regardless of which path you take, chances are that you may do all of these at some point as your business grows? At the end of the day, you have a business to run and none of this matters unless it has your full attention. So find a viable funding solution that also allows you to maintain operations and focus on profitability.
Originally posted 2015-05-10 21:02:04.