This is a guest post courtesy of Miz Sara Mackey on exactly how you can come up with that pesky little thing called money to fund your start-up idea.
Yes it involves those damn business plans.
Yes it involves potentially begging your family and friends for a wad of cash. Just remember to give them Sara’s disclaimer and make them aware they may not get their investment back!
And as a final thought, if you can’t keep business separate from personal when it comes to working with family, you might rethink that bit and just go with some of Sara’s other suggestions.
Some folks are more than capable of mixing business and family without it causing strife, but if you know you’re part of the percentage that doesn’t mix business and family well, better to go alternate routes than create bad blood and a potential rift in the family tree.
Oh and Sara and I would love to hear your own ideas on how you fund a new venture… you can share them in the comments below.
So, you’ve got an incredible idea for a business.
It’s a no-brainer.
In fact, it amazes you that no one has ever thought it about this before! You’ve bounced the idea off a few close friends and family members who understand business and the marketplace, and it’s been nothing but positive feedback.
You’re ready to go. You are going to start your own business, build an empire, and retire young. The American Dream at its best!
The only problem is you’re broke.
Well, you may not exactly be broke, but you definitely do not have the $50,000 or $(fill-in-the-blank) that it will cost to start this new company.
What do you do? Well, the good news is you are not alone. Entrepreneurs all over the world are constantly faced with this dilemma.
In fact, it is very much the exception, and not the rule, to be flush with cash when you come up with a business idea. In this step-by-step guide, we are going to discuss specific steps you can take in order to finance your new startup.
The Plan
Before you even begin thinking about ways to get cash for business financing, the company needs to first exist on paper. It is absolutely imperative that you take time to write out a detailed business plan that outlines the specific business model of the company.
- How will it generate revenue?
- How will you find clients?
- How will you market?
- Do you have a competitive edge that sets you apart, or can a competitor easily push you out of the market?
These are just a few very simple questions to get you thinking. A simple Google search online for “free business plan template” will yield hundreds of search results. Grab your laptop, head to your favorite local coffee shop, and plan on being there all weekend!
Why Write A Business Plan?
Now, the business plan is extremely important because it is, essentially, what you are selling to a potential investor when you seek business financing. Here’s a little comparison to bring it home—a business plan is to financing as a resume is to finding a job.
Very difficult to find a job without a resume. Also, very difficult to secure any type of financing without a business plan. Once your plan is finished, you are now ready to solicit investors for your new company.
How Much Money
As you write out your business plan, you should develop a very clear plan for how much capital you will need to bring your product or service to market. Then, you need to run some conservative projections and determine your monthly cash flow.
These figures should help you determine how much cash you need to raise. If this is your first business, please listen to this advice: It is extremely rare for an entrepreneur to raise enough money!
The number one killer of small businesses is a lack of capital. If you run out of money, your company will fail. Therefore, determine the amount you believe you need, and then multiply it by a factor of 2-3.
This will ensure you have enough to survive the early stages of launch. Once you know the exact amount of cash you need, then you are ready to pitch investors.
Friends & Family
This is by far the most popular method of raising capital for a new company. Before you go after unsecured small business loans, if you believe that your close friends and family members have enough money to meet your investment needs, then this is a great route.
However, there is a cardinal rule that you must follow. Any amount of money you take from an investor must be considered lost capital. New ventures are extremely risky.
Of course, as an entrepreneur, you are probably a very energetic and optimistic person. You can’t think of any possibilities, except for your business becoming wildly successful. And the great news is that could very well happen. But it might now.
Most new businesses fail. Therefore, only take money from friends and family members upon the mutual understanding that the money could be lost. You need to recognize that and communicate it up front.
That will greatly help stress levels remain under control if the business does hit a rough spot. Remember an ounce of prevention is worth a pound of cure.
Outside Investors
If you cannot raise the needed capital among friends and family, then you need to hit the investor circuits in your area. Visit Linked-In and other social networking sites and look for meetings in your area.
There are typically groups of angel investors in every city in America. You just need to search, network, and find them. You can also apply for various unsecured small business loans, but be prepared to pay high interest rates.
Furthermore, an actual investor will be bringing mental capital and support to the table, whereas a loan is nothing but money. Which do you think has more value to provide?
How Much Equity
I wanted to make sure we visit this point. This is where entrepreneurs can make huge mistakes. If your business idea is legitimately good, you do not want to lose a significant portion of future earnings because you didn’t have cash at the beginning.
Unless you are starting a company that has the potential to do tens of millions of dollars per year in revenue, always fight to keep equity.
In fact, the most effective way to finance your business is to bootstrap. Do not take any outside investment. We always recommend new entrepreneurs to keep their day job. Keep a steady paycheck from your day gig and work nights and weekends.
If you work just 4 hours per night after work and you but in a 10 hour day on Saturday and Sunday, you can put in a 40 hour work week in your new company. And you will have stable income.
Of course, you can’t keep that work pace up forever, but you can do it for 6 months to a year, especially if you love the new business.
You will be energized during the startup phase.
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