How to get funding for your small business?
By Turtle Credit Team
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Starting up a business is no mean feat. It takes time, energy, ambition, and resources to start up a business. Although overcoming the initial inertia to starting a business is challenging, generating enough funds to keep the business afloat is also very tricky. Most startups and small businesses fail because they cannot generate enough funds to run and expand the business. This article will establish a roadmap then examine what kind of funding is available for your business.
Start with a small business plan.
Generating the required funds for a business may be difficult, but it is not impossible. Access to relevant information can make this task simpler. Every startup and small business has a business plan in some shape and form. This business plan can help outline the amount of funds that a business will need for its initial rounds of funding.
If any business does not have a business or financial plan in place, it should be an excellent time to get one made. A detailed business plan contains a lot of information about a business, and the amount of funding that a business will need is just a small portion of that information.
Determine how much money you need.
A business can determine the amount of funding it needs merely by looking at its projections for the next twelve months. It must be noted here that the business should also determine how often it will seek funding. The answer to this question can vary with the type and nature of business. A startup with growth potential can have several rounds of financing, whereas a small business without much scope for expansion in size can aim at one-time funding or funding that may last for a couple of years or more.
-Calculate the burn rate
The amount of funding that will be required will depend on the burn rate. Burn rate is simply the rate at which a business uses up its cash. Cash runs a business, and therefore by calculating the burn rate, a business can get a rough estimate of how much money it needs. For instance, if a business has reached $500,000 in its reserves and uses up $50,000 on a monthly basis, its cash reserves will last 10 months.
-Contingency reserve
It is also advised to add a contingency reserve to the number of funds required before arriving at the final figure. For instance, if a business decides that it will need a $1,000,000 in funds, it should be wise to add a contingency fund of $200,000.
Contingency funds are additional funds that a business keeps for the worst-case scenario. At times the projections may turn out to be conservative, and business may overshoot the amount of funds it needed. Perhaps a business planned on hiring 100 employees and ended up hiring 150 employees, or possibly new regulations, may increase the amount of tax payable for a business. Contingency funds are for unforeseen circumstances; it is better to have contingency funds included in the amount of funds required.
Method of funding
The next step is to identify the method of funding. Once again, there is no fixed method of funding. A small business can use either one or many different methods of funding. It all depends on what the objective of the company is.
The methods of funding can be simplified into the following methods.
- Bootstrapping
- Venture Capital and Angels
- Debt
- Crowdfunding
Bootstrapping
Bootstrapping is the simplest way to fund a startup or a small business. Bootstrapping simply refers to self-funding by the owner. Bootstrapping is a good option if the business does not need a lot of funds. A lot of online businesses are bootstrapped. Udemy, the popular online learning portal, was bootstrapped after the founders failed to attract investors. Amazon can also be considered a bootstrapped startup, as Jeff Bezos used his parents’ retirement savings as initial funding.
Friends and family members can also invest in the business to lend a helping hand. Once again, this type of funding is best for businesses that do not need a lot of funds.
VC and Angels
If the funding needs are more significant, the business can pitch its idea to investors such as venture capitalists and business angels. However, if a business decides to take this route, the owners must be ready to have their share of equity diluted as both VCs and angels will require seats on the board and a part of equity.
Business Loan
Businesses can also be funded through Business Loans. If the financial fundamentals are strong and debt is available on favorable terms, then debt can most certainly be used to fund a business. The positive side for debt-based funding is that the interest payments are tax-deductible, whereas dividend payments to investors are not deductible.
Crowdfunding
Crowdfunding has emerged as an innovative business funding option. Crowdfunding is generally taken up by businesses that delve more into creative and innovative ventures. Crowdfunding is different from equity or debt-based funding because the people who fund the business do not get shares in the business and neither do they get paid back for their contribution.
Basically, the business owner pitches the idea of their business, and if the people find that idea to be good, they fund it. In return, the business can send a gift or a token of appreciation in some form to thank the “investors.” Many game development companies start off through crowdfunding and present their “investors” with early access.
The choice of method is a subjective matter and depends heavily on the business owner’s preferences and the objectives of the business. There is no set formula for success. Many successful businesses were bootstrapped; some directly pitched their idea to VCs while others got off to crowdfunding started. What really matters is a strong business plan to convince investors.
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