At times it can seem that every business that emerges has piles of cash to get started. Where do they get it all from? It’s as if they’ve found a hidden source of money that allows them to buy new equipment, open new stores, spend loads on advertising and hire dozens of people like a bunch of ants to run around getting new customers and going global.
There are a few ways to stumble over spare cash. Some of them we don’t recommend; you can steal it, find it, win it, inherit it and marry into it. Not the most reliable when adding to your business plan to be fair.
But where else do you get it from?
Someone you know who thinks you’re a genius
You may find people you know who want to invest in your business. These are often called ‘Angel’ investors (also called ‘one born every minute’). Ideally you want an outside person to be a successful business owner in search of investment opportunities with promising businesses. In return, they usually expect a share in your business or a percentage return on the money they’ve given you, maybe both. Find someone that can give you more than the cash; the advice and direction is often more valuable.
A bunch of people you don’t know who think you’re a genius
In the crowdfunding approach, you get a bunch of people to all invest in your great idea. They contribute the cash in exchange either for shares, or in exchange for the product in advance. You’d say ‘hey, I’m inventing a new scooter that’s green instead of blue, if I can raise $500k I’ll build them, and I’ll send you one’. Brilliant, I’ll have two.
But now funding by the crowd has become mainstream, allowing you to profile your business and attract investment (or loans) from a range of different people who wouldn’t normally be eligible to invest in new businesses without a prospectus. This is an ever changing marketplace so try a web search for ‘crowd funding’ to find a suitable platform for your idea.
Good old tax free money
So the government has free money right? You’re going to start a business and so therefore it’s a no brainer that the government gives you some cash to start. You will employ a bunch of people and help the economy, it’s a jolly good investment. Ummm, sure, the government can provide funds for businesses who meet certain qualifying criteria. This includes loans, grants, export assistance and other initiatives. But it’s not always as easy as sending in an application.
Finding ways to buy stuff without money
Some business owners decide to ‘bootstrap’ their entire start-up phase, which is getting by with the bare minimum and avoiding borrowing. Successful bootstrapping requires discipline and the ability to be ruthless about what you absolutely do and do not need. For example can you:
- Sell any personal assets (that waterbed from the 1970’s can probably go) and convert to cash.
- Borrow any equipment that you need from a similar business if they don’t need it.
- Using any spare office or manufacturing space you can find before you sign a lease
- Using any spare capacity of other businesses while they have downtime (like renting the ovens of a bakery once they’ve finished for the day).
- Enslaving friends and family to work for nothing until you’re up and running.
How to lose friends and annoy your family
Money from friends and family is a popular way of raising the cash you need. But it’s not always an ideal source of money because, if the business fails, you may experience tension at the next family gathering. Family gatherings at your next birthday party don’t go quite so well when lost a bunch of Uncle and Aunties savings.
If you can make this short-term and pay them back as fast as you can, it’s an option worth considering. But make it really short.
And make sure that any financial agreements made with a friend or family member are clearly put down in writing. Clarify when the money is to be repaid, along with any interest that should be due.
Of course, the bank!
Bank financing can take the form of a loan to pay back over time, an overdraft facility that lets you dip in and out of debt when you need it, equipment finance, or a business credit or debit card for short-term expenses. Ok, it’s not free. But it can be handy to have a back-up if all else fails.
Before you apply for business financing, it’s important to know:
- What exactly you will do with the cash. Have you really thought about all the ideas above this sentence to see if you need to borrow money?
- What you’ll use to secure the loan if required. Saying you promise to repay it if the business fails doesn’t usually work.
- How you intend to repay the loan and the schedule of repayments in your cash flow forecasts.
Empty out your pockets
Oh, right, maybe I should have some of my own money? It shows you are prepared to back your business with your own hard-earned cash. Not only can you avoid borrowing costs, but anyone else thinking about investing will see that you’ve got some skin in the game.
To avoid placing your personal finances in jeopardy, consult a financial advisor to determine how much of your own money you can safely invest in your business.
So where has all the free money gone?
If winning, stealing, marrying, inheriting and finding money isn’t working for you, then sorry, you’ll need to work for it, be given it (often with strings attached) or borrow it. As you’d expect, working for it and saving your own money tends to be the most reliable.