Starting a new business is always an exciting time.
But while you might have put in the work to create an excellent business plan and even have some clever marketing strategies up your sleeve, there comes a point where, in order for you to operate effectively, you will have to secure funding.
Maybe you need it to purchase stock or equipment, finance your marketing activities, or simply just require some initial cash flow. Whatever your reasons, your new business venture is likely to be a non-starter if it doesn’t have enough capital to launch it.
We all know that damning statistic which states that 3 out of every 4 businesses fail within five years of launching due, mainly due to lack of funds.
So, how can you avoid this happening to you?
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In this article, we will outline 5 sources of funding for your new business. Which should provide you with a good indication of where you can turn in your search for finance.
Potential sources of funding for a new business
If you need to source funds for your small, start-up business, here are 5 different ways you can do so.
1. Access your savings
Many new businesses, especially those that are owner-operated, are initially funded by personal savings.
While this might not be an option for everyone, if you do decide to put your hard-earned money into the launch of your new business, you should be crystal clear as to what that money will be used for.
In addition, you should also have a firm strategy in place for paying yourself back as quickly as possible.
For many business owners, the main attraction of doing this is to ensure they retain the right to make all the decisions and maintain full control of their company.
Though it does come with risk, if you are able to keep costs low, and utilize this financial resource to attract more sales, it can be a worthwhile and effective option.
2. Ask family and friends
If you don’t have the personal funds available to put into the business, you could always try asking your parents, family or friends for assistance.
Depending on how much you ask for, sometimes this can actually be the easiest of all types of finance to source, purely because they want your business, and thus you, to be a success.
For this reason, they are often less likely to want to see a business plan or projections of profit.
However, before you take their money, just be mindful that, like with personal savings, there are risks involved in putting their investment into your business.
Try and make sure you pay them back in regular, agreed on installments over an agreed timeframe. The last thing you want is for your relationship with them to sour, or worse completely disintegrate.
3. Bank loans
For many start-ups, the most common way to secure funding is via a business loan.
When it comes to this type of finance, banks and lending institutions can provide you with many different options. These include the following:
Essentially a business loan is a set amount of money that is given to you in advance, on the provision that you will pay it off in regular instalments, over a particular time period. Bad credit loan can cause you a lot of trouble so make sure to select the best partner for your business.
These instalments include either a fixed or variable rate of interest and can be repaid over a period of anywhere between 2 months to 5 years and beyond.
This loan can be secured against an asset you already own. Alternatively, it can be unsecured, although typically you won’t be leant as much money by the bank, and will be hit with a bigger rate of interest overall.
Business overdraft or line of credit
If you require an immediate injection of capital then a business overdraft, or line of credit might be appropriate for your needs.
The good thing about this type of business finance is that once it is approved, you typically can access the money on the same day.
You also only get charged interest on the amount of money you use, not the total amount of the overdraft.
For instance, if your overdraft is $10,000, but you have only spent $1000 of it, then you will just be charged interest on that figure of $1000.
Usually, the interest rate for the overdraft tends to be a bit higher than it is for a standard business loan. However, you do have the facility to reduce the limit regularly should you want to.
Also, the overdraft does not have a specific end date. Essentially only ceasing when your balance returns to positive numbers.
Another decent option for those who require quick access to money is invoice finance.
Also known as accounts receivable finance, it involves the bank or financial institution providing you with the funds upfront for unpaid invoices that are owed to you.
Unfortunately, you do not receive all the outstanding monies owed to you – most typically only between 80% and 85% of it.
However, like with an overdraft, once you have been approved, you should normally be able to access the money within 24 hours.
A finance lease is a handy option for start-ups that require a particular asset, such as a car or manufacturing equipment for a limited length of time.
It involves the bank, or financial institution, buying the asset and then renting it back to you for that specific period. Before they then return it to the manufacturer.
During this transaction, you do not own the asset at any point. Although the payments you make to the bank may well be tax deductible.
Commercial hire purchase
Similar in concept, commercial hire purchases differ slightly from a finance lease in that the bank actually purchases the asset for you.
Then, over an agreed timeframe, they allow you to use it on the agreement that you will make regular repayments.
When all the payments have all been made, you then assume ownership of the asset.
One of the benefits of this option, is that both the interest paid on the finance, as well as the overall depreciation of the asset could be tax deductible.
Often referred to as a ‘goods loan’, a chattel mortgage is mainly used to buy equipment or vehicles.
It differs from commercial hire purchases in that it allows you to purchase an asset outright for your business upfront.
You will need, of course, to make regular repayments until such time as the loan has been paid in full.
But, similar to commercial hire purchase, the interest and depreciation might well be tax deductible.
For more information about business finance, please see this article from Westpac.
4. Government grants
For hundreds of start-ups and small businesses in general, government grants can provide them with the significant cash boost they need.
Distributed by both the federal and state governments, there are many different types of grants that you can apply for.
To receive them, you will have to meet certain eligibility criteria and fill out plenty of paperwork. But if approved, the sums of money you could receive, may well give your business the firm financial footing it needs to become successful.
If you don’t have the personal finances in place and would rather not borrow from family, friends or the bank, then another great option is to find yourself an investor.
Here are some ways you can do that.
In recent times crowdfunding has become a popular option for those seeking finance, thanks to the increasing traction of sites like Fundly, Kickstarter, Patreon and Indiegogo.
Giving you a platform in which to present your business pitch, which people can then choose to make an investment in if they like what they hear, this could be a very good way for many start-ups to raise capital.
Depending on your business needs, you might not get all the money you require. But if used in conjunction with other ways of raising finance, you could source a decent amount of capital.
For some start-ups, venture capital is a terrific way to kickstart their business.
Essentially, this comprises a private equity firm who invests money into new and/or small businesses which they believe have a high possibility for growth.
If you manage to convince these firms of your company’s potential for success, you can end up securing for it, the backing of huge sums of money.
Not only that, but you can also draw upon the expertise and business contacts of these investors, which may well expedite your ascent into profitability.
While there are some clear benefits to venture capitalism, one main drawback is that these types of firms will usually demand a substantial proportion of your equity.
Often this can exceed 50%, which would mean you will no longer have control of your company. So that is something you will have to seriously consider before agreeing to it.
However, it is worth noting that these investors would have a significant interest in seeing your company succeed, so would do everything within their power to make this happen.
Angel investors are another potentially lucrative way of securing funding for your business.
Most often they take the form of successful entrepreneurs and businesses who enjoy the challenge of helping fledgling businesses flourish.
If your pitch interests them, and they can see ways of how they can help your business to prosper, they may well be prepared to invest money in it.
The good thing about angel investors is that they generally don’t ask for much more than a 20% equity stake.
Also, they usually act as a mentor too. Offering experience, advice and connections that could put your business well on the road to success.