Ten Ways to Fund Your Business Plan
A great idea sparks most business start-ups, but money is the fuel that keeps those start-ups running. Even if you’re launching a one-person freelance business, chances are you need cash to get off the ground. If you’re starting a bigger company, and especially if you’re founding a high-tech or manufacturing enterprise, chances are good that you need lots of cash.
Fund your business plan from your own pocket
Using your own funding for your start-up has its advantages and disadvantages. If you get your business up and running by using only your savings, you maintain 100 percent ownership and 100 percent control. But you also take on all the risk: If the company goes under, your money goes with it.
If you link arms with investors, you still tap your own pocketbook, but you share the risk — and the rewards — with others. If you seek loans, banks require you to pledge personal assets as collateral to secure the debt. And if you go the venture capital route, most investors insist that you ante up some of your own cash, largely as proof of your commitment, before they’ll add their own.
Fund your business plan with help from friends and family
Turning to friends or family members is a time-honored tradition when starting a small business. Some people borrow money in return for a simple IOU to be paid back in full when the company starts making a profit. Others set up a more formal loan along with an agreement for paying money back with interest on a specific schedule.
Whatever arrangement you reach, make sure that everyone involved understands the terms and knows what to expect and when to expect it. To be on the safe side, put the terms in writing and ask all parties to sign the documents because disagreements over money can spoil even the closest family or friendly relationships.
Fund your business plan with help from prospective customers
This option sounds counterintuitive, but you can turn customers into investors who can help your company get off the ground. For example, community-supported agriculture programs pair local farmers with consumers who pay a set fee in advance in return for a weekly load of produce during the summer growing season. And condominium projects often sell units to prospective owners before the builder ever breaks ground.
When considering funding sources, think of people who use and benefit from your company’s offerings. They may be willing to invest in your continued success.
Checking in with prospective customers early in the planning process also offers a useful reality check to test whether they will actually pay for your products or services.
Fund your business plan with a bank loan
Local branches of most banks are more than willing to consider loan requests from local businesses. The factors that influence a banker’s yes-or-no loan decision include your personal credit history, your education, expertise, business experience, and the likelihood that you’ll succeed in your business start-up or expansion.
Before you consider approaching a banker, be prepared to make your case by presenting a formal written business plan along with a loan request that defines how much you want to borrow, how you plan to use the funds, and when you’ll repay the money. Also, be prepared to secure your loan. Most banks won’t lend unless they can secure the loan against collateral.
The simplest bank-loan arrangement is a standard commercial loan. In this case, the bank loans you the money, and you pay it back, usually in monthly installments and with interest. But you can find all sorts of variations on this theme, from real estate loans on commercial property to loans secured by your inventory or accounts receivable.
The advantage of getting a bank loan is that you gain business funding while maintaining all the equity in your company. The disadvantage is that loan payments are due on schedule, even if your business runs into hard times.
The task of securing a business loan is tougher than ever in the aftermath of defaults caused by the economic downturn. But banks are still lending, and the work you do upfront to convince a loan officer can make your business strategy all the more effective later.
Fund your business plan with a commercial line of credit
If you need access to money that you don’t intend to need all at once, consider applying for a commercial line of credit. A commercial line of credit is an agreement from a financial institution to extend a specified amount of credit that your company can draw upon, as necessary, to finance inventory purchases or to provide working capital or funds for other cash needs.
With a commercial line of credit, you pay interest only on the funds you actually borrow over the period between when you draw on the funds and when you pay them back. Banks may require that you secure a line of credit with your company’s accounts receivable, inventory, machinery and equipment, or real estate.
Fund your business plan by leasing equipment
Another way to borrow money from banks is in the form of an equipment lease, which you can use to acquire anything from computers, printers, and copiers to manufacturing equipment, tractors, and trucks. Financial arrangements include lease-to-buy options, equipment upgrade options, and master leases, which cover a variety of equipment under one agreement.
The loan length for these options is usually tied to the lease term, and most banks base their leasing agreements on a company’s established operating history.
Fund your business plan with a Small Business Administration (SBA) loan
Bravo to the Small Business Administration (SBA), which is a government agency dedicated to helping small businesses that may otherwise have a tough time securing financing from commercial banks. The SBA has a variety of loan programs for small businesses.
When seeking an SBA loan, realize that it isn’t free money. Expect to pay fees and interest and be ready for paperwork, oversight, and the responsibility of personally guaranteeing loan repayment. The loans are actually made by banks or other lending institutions, but because the SBA provides the backup guarantee, loans that banks may otherwise turn down get extra attention.
Fund your business plan with help from deep-pocket partners
It sounds like a marriage made in heaven: Entrepreneur with great business idea but no money finds like-minded entrepreneur with money in search of a great idea. In fact, many such partnerships live happily ever after.
But if you’re thinking about forming a financial partnership as a way to get the cash you need, establish an upfront agreement that defines how much control your partner or partners will exercise over the business strategy, planning, and day-to-day operations. And be sure that you get along. It may sound obvious, but a good working relationship with a business partner can help smooth the inevitable bumps on the road to success.
Fund your business plan with venture capital
Maybe you need more money than a bank is willing to lend you. Or maybe you’re nervous about taking on all the risk of a major loan. You may want to knock on the venture capital door.
Venture capitalists are professional asset managers (in other words, investor groups) who seek a high rate of return on behalf of the investors they represent. When venture capitalists are impressed by a business concept and confident that the management team has what it takes to make the business succeed, they fork over sizeable sums.
The catch is that they want something in return, and usually that something is a big role in controlling your business, a major chunk of the ownership, and a clear way to recoup and realize a substantial return on their investment at a specified time in the future.
Venture capital tends to flow when the economy is booming and to slow to a trickle when it hits hard times. But for a truly great idea, there are usually venture capitalists willing to open their wallets.
Fund your business plan with angel money
Angels are successful and wealthy entrepreneurs who buy into up-and-coming companies, not only with their money, but also with their expertise and guidance. Angels make funding decisions more rapidly than venture capitalists largely because they operate independently rather than on behalf of a group of investors.
Additionally, angels take greater risks than venture capitalists, funding businesses at earlier stages of their life cycles and entertaining smaller financing requests. However, like venture capitalists, angels usually want a piece of the equity pie.