Starting a new business can be expensive, so it makes sense to seriously consider investment options right from the beginning. However, first you’ll need to be well prepared for the obligation that comes with getting funding, the questions to ask, and the small print to consider. So how can you prepare for this?
Challenges faced by small businesses starting out
Some businesses can be launched without much capital. For example, if you're planning to provide remote services while working as a sole proprietor, you may need nothing more than a laptop and an internet connection.
But other types of businesses need money to get started. If you intend to launch a business that needs significant capital expenditure (such as a retail or manufacturing business or a company that employs several other people), you won't get far without initial funding.
Seven questions to be ready to answer
Whoever lends you money will want to know you're serious about investing it to grow your business. They will also want to know that you'll be able to pay back the loan principal and the interest.
Make sure you have the answers to these important questions at your fingertips when talking to a potential investor:
- How much money do you want to raise?
- Will you be able to provide any collateral? What are your assets?
- Are you looking for debt, equity or other financing?
- How is your business credit rating? You can check this yourself in many countries.
- How is your personal credit rating? This too – and yes, the banks will check.
- How long have you been in business?
- What is your revenue?
Use professional accounting software to prepare charts and forecasts of your costs and revenue. This will help convince lenders that you have a solid business plan in place.
Whoever lends you money will want to know you're serious about investing it
to grow your business.
Always read the fine print
The terms and conditions of most loan agreements include the option for the lender to call in the loan at any time. That means the lender can ask for all their money back, with little or no notice, and regardless of whether you've been paying on time up to that point.
This doesn't happen often, but when it does it can be devastating. Unfortunately it happens most often during recessions, when banks and other lenders become more nervous about the likelihood their loans won’t be repaid.
This is just one reason why you should read the fine print of any loan agreement carefully. Get legal advice if necessary, and work with your accountant or financial planner to determine how much you can safely borrow. Make sure you understand all the terms of the loan before you sign.
Understand the cost of investment
When raising money for your business, you're unlikely to get something for nothing. Your investors will want something from you in return for risking their funds:
- For bank or credit card loans
The cost to you is the interest rate and the risk of losing any collateral you've put up.
- For angel investors and venture capitalists
The cost is usually a percentage of ownership or control of your company.
- For crowdsourced funds
It's whatever you've pledged to deliver in exchange for the money raised.
- For friends and family
It could be any of the above plus the risk of ruining a good relationship if things go wrong.
In other words, getting funding creates an obligation. It means you have a responsibility to make the most of the money you've been given.
When raising money for your business, you're unlikely to get something for nothing.
That might seem like a challenge, but on the plus side it can help you to focus on your business and concentrate on making it a success.
Once you have the money, make it work for you. Use good quality accounting software to keep track of the amount you've borrowed, what you use it for and how much you pay back over time. Read Part II of this guide for eight ways you can raise funds for your small business.