When it comes to business, there is an old adage that you have to spend money to make money. Whether you are looking to buy stocks or just get your work from home website up and running, you will need to find some type of investment to get your business going.
Of course, there are many types of businesses that do not require financing in the traditional sense. Any business in which your time is the main product requires only an investment of hours. Still, you may need an outside investment to support the period of time you need to put into your business before the money starts coming in.
In the middle of a recession, it would be natural to think that investment is hard to find. However, with the growth of crowdfunding services like Kickstarter, getting the money you need to start your own business is potentially easier than ever.
The first steps of financing
One of the most common problems every entrepreneur faces is underestimating the amount of funds needed. Similarly, it is important to be careful not to overestimate, making the target amount an achievable goal.
A good first step in estimating and obtaining the financing you need is figuring out exactly how your money will be spent. This is where a business plan or investment proposal comes into play.
Without experience, writing a complete business plan can seem like an impossible task. However, there is a wealth of content online that can help you get started. Business Link, a body funded by the UK government to promote new businesses, offers a step-by-step guide to writing a business plan for a new company, or one you hope to grow.
However, ultimately, there are only two guidelines that you need to follow. First, find out exactly what you need. In advertising, inventory, equipment and personnel, come up with a cost estimate for each part of your business. Second, be sure to justify why you need each of these things. This is not only important information for a potential investor, but also a great way to eliminate unnecessary costs; If you can’t justify it, leave it out of your plan.
Would you invest in yourself?
This is a great question to ask in two ways.
First, use this question to rigorously examine your business proposition or growth strategy. Forget everything you know about your business and its plans that is not in that document. Would you bet your savings on the success of the company? Or would the investment be considered high risk?
There’s no one right answer: Some of the world’s largest organizations started out as high-risk investments. But knowledge is everything, so make sure you know what type of investment prospect it is before you start.
Second, if you’d be happy to invest in yourself, can you? Is there a way that you can find the money yourself, with the confidence of knowing that your investment will pay off? Don’t forget that even Lord Alan Sugar needed an investment to start his business, so he took £ 100 from his personal savings.
Maybe you could cancel this year’s vacation or stop eating out. If it is possible for you to finance your own business, work hard to make it happen.
Traditional sources of financing for startups
Once you have an idea of the type of financing you will need, it is time to start looking for investors. Although a trip to Dragon’s Den is a great way to get some exposure along with the money you need, here are some of the more realistic traditional routes to finance.
Banks
Banks are the most obvious place to invest in your small business. A traditional bank loan generally offers good interest rates and does not require you to give up part of your business. However, most bank loans will not be able to match the large-scale investments offered by venture capitalists and private investors; after all, a bank is obligated to help as many people as possible in a small way.
After putting together your proposal, visit your bank. Although some banks will offer loans to people who do not currently have accounts with them, your own bank will better understand your finances and hopefully treat you preferentially.
Private investors and venture capitalists
As soon as you hear the phrase ‘private investor’ or ‘venture capitalist’, it’s easy to get intimidated. In fact, these terms are very simple: they are people or organizations who want to invest part of their money to make a profit.
In exchange for the investment, you will be asked to part with some capital in your business. For example, if your business is currently valued at £ 250,000, an investment of £ 50,000 would normally give the investor 20% of your business. In practice, this means 20% of control and, most importantly, 20% of all profits.
However, private investors are likely to be more flexible. If you can connect with someone who truly believes in and is passionate about your new business, you may be able to find a better deal.
A great place to start looking for venture capitalists or private investors is online. A quick Google search reveals hundreds of companies that are willing to listen to investment proposals, including niche investors looking for specific types of businesses.
Get your capital from the crowd in the cloud
Increasingly, investment has taken on a different face, a friendlier one.
Websites like Kickstarter.com, Fundable.com, and Crowdcube.com take a distributed approach to investing, making it possible for individual consumers to invest small amounts in the products they like. Of course, when you add up these small investments, you can get staggering amounts of financing.
Crowdfunding, also sometimes called cloud funding, works like this:
- You put a proposal online, detailing your business or your idea. Include rich media, such as videos and images, that showcase your business potential and the products involved.
- Set a target amount that you want to get.
- Investors and clients can “invest” in the business. They usually do it for specific rewards. This could be shared capital in the business and potential profits, one of your products, or just about anything.
- If you reach your target amount within the specified time (depending on the site), it is yours – the money is rolled over and you can continue to build your business and thank your investors.
According to online magazine The Browser, crowdfunding websites attracted € 10 million of investment in 2011.
Crowdfunding: the Glif success story
One of the biggest success stories comes from Kickstarter.com, where two men from New York posted a proposal for a new iPhone accessory. The Glif is incredibly simple, used to mount the iPhone 4 on a tripod for better photos and footage.
The inventors offered four different investment levels, from $ 5 to $ 250, with a target investment of $ 10,000. In just a few days, more than 5,000 people had shown their support for the product by effectively ‘pre-ordering’.
Since then, the Glif has gone into full production, not with the required $ 10,000 budget, but a staggering $ 137,417.
For more information on The Glif, check out the Kickstarter investment page.
Crowd Funding tests your idea for free
Although some of these crowdfunding sites are designed for creative businesses, they mark the future of funding for almost everyone. Who better to be passionate about your business and make an investment than the people you hope to sell to at a later date?
Additionally, crowdfunding gives you the opportunity to test the market for your products or services. The people who invest money through these websites are the people you will eventually sell to, so posting and marketing your proposition is a free way to start building your brand right now.
The creators of The Glif were able to continue production with confidence, because they had already demonstrated a large market for their product.
And of course, if there are no investors willing to invest in your business, perhaps you should reassess whether there really is a market.
If you don’t ask, you don’t get
If I had to give advice to someone looking for an investment, I would say ask for it. It sounds painfully simple, but in reality, many small businesses never get off the ground because people don’t trust they can get help.
If you have a hot idea or a great business plan, there will be someone who can help you make it happen. So ask them! Get in touch with potential investment sources, ask your bank, and never be ashamed of wanting money for your business.
When looking for financing, remember that you are not asking for a favor, but rather offering the opportunity to be a part of something exciting – your business.