You see it happen all the time: Someone has an amazing idea for a business, but they don’t have the cash to get it off the ground. Instead of seeing their idea come to life, that person stays in their job and their great idea goes to waste.
Starting a business can be taxing and there are unavoidable costs to getting a business up and running. However, that doesn’t mean you need to be afraid if you don’t have millions of dollars in your bank account. All you have to do is find the right source of funding for your business.
Whether you need a lot of money or a little bit, there is a way to get the funding that you need. In this article, we explore the different types of funding that can help you start your business.
Why Your Start-up Needs Funding To Survive
Any business needs funding to survive. In fact, most entrepreneurs will need to ask for money — or at least provide a return on investment — before they’ve even opened their doors.
There are three types of funds that every business needs:
- Operating capital
- Reserves
- Investment funds
In the early stages, your goal is to get enough operating capital to get started. Then, the focus shifts to getting operating capital and reserves. Having both makes your business table. Once it is, you can begin focusing on investment funds for long-term developments.
Operating Capital
Operating capital is money that you use to run your business. It pays for everyday things like office space, staff, utilities, marketing, and acquiring inventory. In essence, it is the money that you need to get your business up and running.
When you are first starting your business, this is the money that you need to focus on. Have an idea of what it will take to run your business day to day for up to three months, and focus on finding a source of income that is enough for that. As your business grows, you can focus on funding for other things.
Reserves
Reserves are funds that you have in savings to pay for future operating expenses. There are two types of reserves: subsistence reserves and backup funds.
Subsistence reserves are used to support operations until your business can pay for itself. It is a good rule to try to have enough subsistence reserves for at least six months. You also need to get your business to support itself as soon as possible so that you don’t run out of subsistence reserves.
Backup funds stay in your savings account and are held there as an emergency or backup fund. If something happens where your business can’t make ends meet, then you use this backup.
Investment Funds
Finally, investment funds are the savings that you can use to invest in growing your business. The money is separate from your reserves or operating capital. It either comes from outside investments or company profits and is reinvested in the company for things that you need to grow, such as hiring more staff or purchasing specific equipment.
Options for Funding a Start-up
There are plenty of ways that you can fund your business. Here are a few of the most commonly used options.
Self-Financing
Self-financing can be a great way to get your business up and running. In self-financing, you front all of the money for the business from assets or savings that you already have. If you already have some savings you can use or a large amount of equity in your home, you may be able to get enough to fund all or most of your startup costs.
Self-financing is the least risky option for finding funding as long as you don’t use your house or car to finance the business. For example, taking the equity out of your home can leave you with more debt than you can handle if the business fails.
Crowdfunding
Crowdfunding is a way to raise funds for your business by getting other people to invest in it. It’s more common for creative projects, but you can use it to fund your business as well. The two largest crowdfunding platforms are Kickstarter and Indiegogo.
You can also fund your business with equity crowdfunding, but it’s only available to accredited investors. These are people who earn enough money each year to meet certain thresholds for net worth and annual income.
If you don’t meet the criteria, there are other types of crowdfunding you can use. There are a few crowdfunding sites geared specifically towards entrepreneurs. These are called equity crowdfunding sites. You offer investors a stake in your business (and an expected share of the profits) in exchange for funding. This option is only available to people in the U.S.
Business Loans
If you have a good credit score, you can apply for a business loan to fund your operations. Business loans tend to come with higher interest rates than personal loans, but they’re also easier to get. Start by researching your options at your local bank. You may also want to look into peer-to-peer lending sites like LendingTree, which connect you with multiple lenders.
Angel Investors
Angel investors are high-net-worth individuals who invest their own money into a variety of start-ups in return for a share of the company. Typically, angel investors are looking for a larger return on their investment than banks offer.
If you’re looking for a large amount of funding, angel investors may be your best option. You can find angel investors through networking, at events and conferences, or online through sites like AngelList.
Incubators and Accelerators
Not all funding options will give you cash upfront. Some programs, called incubators and accelerators, offer you funding and mentorship in exchange for a small equity stake in your company.
They’re designed to help you grow your business faster by giving you access to experienced mentors who can help you plan your operations and marketing strategy and provide a bit of seed money to get your company started. In return, you give the incubator a small stake in your business.
Government Grants
Often, the government funds research that can benefit all sectors of industry, including those related to business. You can search for government grants on government websites like Grants.gov. You can also check with your state government to see if they have any grant programs available for small businesses.
How Much Funding Do You Need?
You may find yourself wondering just how much you need to get your business off the ground. The short answer is: It depends.
Every industry is different, and you have to consider a number of factors when determining how much funding you need to start your business. You’ll also need to factor in operational costs once your company is up and running.
When you do go to raise funds to start the business, seek enough funding to have your business run for three to six months. For most businesses, it takes that long to become profitable.
Multiple Rounds of Funding Are Common
Many successful businesses will receive multiple rounds of funding from multiple sources. This is a great way to keep your company afloat until it begins to make money. Each round of funding can help you grow your business. However, it is important to make sure that you are not giving away all of the equity or other value in the company while raising funds.
How to Find Funding for Your Startup Business
Finding funding all depends on what methods you want to use. From angel investors to the government, there are plenty of options out there. Just make sure that you vet your potential investors before accepting anything from them. Once you strike a deal, it is often too late to back out of that deal and you may be stuck working with someone that does not have your best interests at heart.
Also, make sure that you are not incurring too much debt for you to handle. It can be easy to lose track of who you owe money to and how much you owe. If this happens, you may find yourself in a position where you cannot pay back what you owe even if your business does turn profitable.
Include Helpful Services in Your Funding Goals
If you are busy raising funds and running your business, then you don’t want to spend a lot of time doing basic administrative work. Improve your appearance to investors while also relieving the strain on your administrative team by having someone who can always answer the phone for you.
Answer Aide’s phone services provide 24/7 coverage for your phone lines so that you never miss a call and the important calls get filtered through to you.
If you’re ready to get started with a professional answering service, we’re here to help. Contact Answer Aide by calling (866) 427-3500 or by filling out our online form. We’re happy to partner with you to support your business while it grows.