- Financial capitol is one of the key inputs for growing your firm. This is the money you use to buy what you need to make your products or provide your services. Your motivations and goals will impact the types and amounts of capitol you raise. You may be driven by financial gains and rapid growth. You may want to be your own boss or do something you genuinely love. Augment family income while balancing work and family. Or maybe you're pulled into entrepreneurship by an unmet need in the market.
Your motivations will not only impact the kind of business you start, but also what kind of financial strategies you use. If you want and need your business to scale quickly, you may decide to bring in equity investors, otherwise you may be able to finance the business through person savings and earnings. However you decide to finance your business, remember that bootstrapping will allow you to get the most out of your plan. Bootstrapping involves techniques that lower expensive and leverage the resources you already have on hand.
These could be, number one, working out of your home, two, attaining low cost or no cost services, such as using equipment at a local restaurant or church, three, leasing rather than buying, four, delaying compensation, five, using temporary personnel, or six, bartering to obtain products and services. It could even involve a Kickstarter or CrowdFunding campaign in order to prototype or pre-fund your product. For more on this, you can listen to the modules on bootstrapping and crowd funding.
Once of the most common sources of start up financing is debt. Because banks rarely lend to early stage start up, debt financing usually involves loans, from friends or family, credit card debt or personal loans. While you may need to take on personal debt initially, once your business is established, with steady sales, profitable growth and collateral, you should try to do debt financing through your company. The advantage of debt financing is it allows you to maintain full control over your business. Plus, interest on a business loan, is tax deductible.
The disadvantage is that you have to service the debt, which could be a risk. If your business doesn't generate sufficient cash to make the debt payments, you may need to use money from your personal accounts to service the debt, otherwise you will likely suffer the consequences of defaulting on a loan. Another common source of financing is equity. This is usually most appropriate for business looking to scale quickly. Equity financing involves selling an ownership stake in your business for cash.
Equity investors may come in the forms of friends and family, angel investors, high net worth individuals who take a personal stake, or venture capitalists, a professional investment organization that invests in order to make a profit. At some point, you may even explore an accelerator, which typically takes five to eight percent equity in exchange for a small amount of start up cash and mentor-ship. Not surprisingly, this is the hardest type of financing to obtain because it comes at a huge risk to the investor.
More than a third of all new businesses fail within the first year, so you will need to persuade the investor that you, the entrepreneur, and your business are a risk worth taking. Further, once you sell a stake in your company, you've got partners. This will involve collaboration and shared decision making. If the business does fail, you don't need to pay the investors back, but it's important to be aware of the implications for relationships if you do loose their money. You could loose something much more valuable.
So take this very seriously. One other option that may make sense for potential high growth business is convertible debt. This is a hybrid between debt and equity. You're not ready to decide on valuation or you want the option of paying back the cash. This is typically issued to angel or venture investors who are looking to back you and are ready to provide a smaller initial round of financing. Now that you know what kinds of financing options are available to you, circle back to your motivations and what kind of business you're starting.
Once you've decided on the why and the what you'll have a good idea of the right financing strategy for you and your business.
- Cite the steps that can help you find an unmet need.
- Differentiate between a business and a hobby.
- Recognize how to decide between an online business and a brick and mortar business.
- Describe how to protect your intellectual property.
- Explain the best practices for hiring the right people.
- Recall the importance of tapping into networks of expertise.
- Cite the best practices for building a business website.
- Summarize the best metrics to use for your online business.