Starting a business involves lots of ups and downs, including surprises and, most importantly, funds.
The chance of failure increases significantly for a business without enough funding to settle its operational expenses.
Types of funds for businesses
Generally, there are three major funds that a business can access;
Equity
Funds in this category are secured by a specified percentage of ownership of the business. If bootstrapped (self-fund), for instance, then the owner is likely to have 100% ownership. For businesses with outside investment, the equity (ownership) is divided among investors.
It’s not required to be repaid.
Debt
This includes small business loans provided by banks or family members. It usually does not come with a demand for equity in the business but would need to be repaid with interest and within a time frame.
Grants
Governments and organizations offer specific amounts of aid to businesses to improve their survival rate. This is done to encourage businesses and, in a ripple effect, help to employ more people and solve the targeted problem.
Most grants are given to businesses solving or encountering certain problems. For instance, a grant may be announced for businesses offering solutions to solve the climate crisis.
Important things to do before seeking funds for any business
The chance of securing funding from investors or banks is largely dependent on the viability of your business. Investors look out for businesses with profitability potential.
This is why every business owners need to ensure doing all that is required to be successful before seeking investment.
Research your idea
Conducting market research is important to understand the market for your product and/or services before pumping funds into it. This is important, especially if the business is at the idea stage.
A market study will help identify the following;
- Targeted audience: This is an insight into the age group, demography, and interest of people who are likely to patronize your business. The knowledge of the targeted audience could drastically reduce marketing budget wastage.
Youths, for example, are more likely to patronize a new clothing brand inspired by hip-hop culture, meaning they are the targeted market.
- Competitors: For every market, there are both direct and indirect competitors. For some products, there may not be a direct competitor, notably if it is a revolutionary innovation and patented. Buyers also have other things they spend their money on; therefore, those brands are your indirect competitor. It is left to you to make them spend on your product/services instead.
- SWOT: Strength, Weakness, Opportunity, and Threats (SWOT) is an analysis of your competitive edge (Strength), what you could offer that competitors in the market cannot; your lags (Weakness), and what your competitors have that could reduce your chance of market survival such as higher advert spending/budget; things that the market needs and other are not looking at incorporating (Opportunity); the available resources competitors have and governmental policies that could make you go out of business (Threats).
Write a business plan.
After you have conducted thorough market research, use that information to write your business plan.
It outlines your plans for launching the business, its future performance, and the required budget. A business plan should consist of the following:
- Vision: You should detail your business concept, plans, and how you intend to achieve the highlighted expected growth over the years.
- Mission: Explain how your company will meet the target market’s needs with its products and/or services. You should also include why your offers are better than that of your competitors while stating your best means of reaching these customers either online or at a physical store/office.
- Objectives: This should include your plan for profitability and metrics to measure performance over time. Good performance for a start could be acquiring a specific number of customers with a clear statement on when you are looking at being profitable.
- Pricing Strategy: There are different factors considered when pricing a product. Explain why you think your price is best and better than that of the competitors.
- Marketing and Advertising Budget: Explain the kind of channel you are looking at reaching your targeted audience through and why. Consider both digital and traditional marketing channels.
- Operational Cost: Enumerate what it would cost you to effectively operate and thrive. Include the number of employees you are looking at hiring and why you need them. Remember, the experience level of employees needed could influence the salary structure.
Choose a legal structure.
The legal structure of a business determines how it is treated by the law. Typically, a business is an entity and considered an individual on its own except for sole proprietorship.
A sole proprietorship company only registered as a business name could expose its owner to legal proceedings as the law sees the owner and the business as one.
Meanwhile, registering the business as a company differentiates it from its owner and operators.
Business legal structure varies. It includes Partnership, Limited Liability Company, and Corporation.
Settle for a business name and brand identity
Naming your business is one of the most fun among all the processes of setting up a business.
When discussing the success of the company, you are likely to joke about how you came across the name.
A business name and brand identity should resonate with your targeted audience. Domain name availability may affect the choice of the business name for a company that would operate mostly online such as an eCommerce business.
Decide location
Citing your business at an easily accessible location for potential customers is important.
A coffee shop, for instance, is best cited where people can easily walk in to order instead of having it on the third floor of a shopping complex.
Likewise, some businesses/services could be run comfortably digitally, saving the customers the stress of in-store visits.
Register with relevant authorities
To stay clear of avoidable lawsuits and fines, register your business with the appropriate authorities and get all required licenses before commencing operation except if permitted.
Ways to fund your business
When all of the above is ticked, then you can comfortably pursue funding for your business idea or startup.
Self-funding/Bootstrapping
The best fund for any business is self-funding/bootstrapping, but not usually available. It includes personal savings and credit card loans. When no one believes in your idea (yet), or you prefer not to be bossed around by investors, this is the funding option for you.
Profit from the business, in this case, is usually reinvested in the business, making the cash flow more buoyant.
Family and friends
Family and friends could provide funding for your small business. They may offer it in the form of equity, loan, or grant. The only problem with getting money from these groups of people is that your relationship with them may suffer if the business fails.
To avoid unpleasant family gatherings to resolve issues, make sure they fully understand the nature of their contribution. If possible, get everything documented legally.
Small business loans
Traditional banks and other financial institutions offer loans to businesses. It comes with a specified interest rate and payment deadline. It is perfect if you think your business will be able to return enough profit to clear the debt on time.
Angel Investors
You can present your business to individuals or groups of affluent people interested in investing in small businesses.
Unlike loans, these funds will require giving up some of your equity shares. They invest in the future of the company and could also bring on board their expertise and connections to improve the business competitiveness.
Partners
Taking a partner may also create the required funding for your business. A partnership does not necessarily need to be in the form of funding; it could be to leverage the partner’s resources in exchange for equity or use of your resources too.
Venture Capitalists
These investors are similar to angel investors, only that they operate as a company instead of as an individual. They invest in return for equity.
Crowdfunding
There are different crowdfunding platforms to pitch your business so that interested persons could reach out and invest. The funds could be provided in the form of debt or equity.
It is typically done online and does not require having an investor with lots of money on board. A large number of people contributing a small amount of money is all you need to reach your funding goal.
Mistakes to avoid when seeking funds
Funding would undoubtedly help any business thrive; making deadly mistakes due to ignorance while raising the money could be the end of the venture.
Here are some mistakes to avoid:
Not been realistic
In your effort to impress potential investors, business owners may overestimate their future revenue. It would become a problem when the company is unable to deliver on the promise.
Failure to research investors
Investors such as Venture Capitalists usually have specific types of businesses they invest in. Research the criteria they use in evaluating if your company is investable.
Offering too much equity
You do not want to give away control of your company. It might appear not to be a problem now but could be a costly mistake in the future.
Accepting tempting offers
Do not accept any funding offer unless you have thoroughly reviewed it. Get your business lawyer to help interpret every detail of the deal and all possible consequences. When a deal is good to be true, you are likely to be swindled.