The old adage is true: It takes money to make money. Startup outlay, payroll, and manufacturing and equipment costs can easily deplete even the most well-balanced budget.
Unless your last name happens to be Buffett or Gates, you’re going to need to make some difficult decisions regarding funding.
Here are a few tips to help make your choice a good one:
1. Have a Solid Business Plan
Traditional lenders (banks, credit unions and other lending companies) aren’t going to give you the cash you need unless you can show them you’ve got the power to pay it back.
How do you show a sound plan? Well, you need to lay out a few things, such as a summary of why your idea is the best (and how it’ll make money), a breakdown of your team members and what makes you special, financial logistics and, of course, how much money you expect your business to make.
A great business plan doesn’t ensure success, but a poor one nearly guarantees failure.
2. Decide on Debt vs. Equity
You’ve got two ways to fund your business: debt -- loans and credit cards (and their resultant interest fees); or equity -- giving part of your business away to investors in return for funding.
Think of your business as a new home. In a debt model, you own your home-- hook, line and sinker. You can knock out a wall or paint it pink with purple polka dots if you so choose. However, everything is on your shoulders: the taxes, the fees, the broken water heater and the hole in the roof.
In an equity model, you own your home -- but rather than take out a mortgage, a few friends help you foot the cost. The flip side is that you don’t have total control of where to put a nail and what color to paint the exterior.
If you don’t require absolute control and you’d like someone to back you (and can find someone willing), equity is the way to go. If you need total jurisdiction, a debt model might be your only option.
3. Evaluate How Long Funds Will Be Needed
You wouldn’t take out a long-term loan for a pack of chewing gum, and you shouldn’t take one out for printer paper and ink pens, either. Evaluate how long it will be before your business becomes solvent, and don’t borrow more than you need.
Long-term loans come with lower interest rates, but that interest still can linger as red ink. Short-term loans or revolving lines of credit might be a better, cheaper option (even with their higher interest rates) if you only need the money for a brief period of time.
4. Optimize Your Funding Structure
For many businesses, a mix of long- and short-term loans can help you to optimize your entire structure. Revolving credit is there when you need it, whether you’re short on payroll or customer accounts are past due. Long term loans can help you purchase equipment, inventory or a brick and mortar store for your business.
Balancing debt vs. equity is also a bonus. Taking on a partner or two (silent or vocal) can take some of the pressure off of your pocketbook while still allowing you to maintain a level of control over your investments.
5. Explore Non-Traditional Crowd Source Funding
Websites like Kickstarter and Indiegogo are the newest ways to raise capital for your business and the secret to success goes back to our first tip: Have a solid business plan.
With crowdsourcing, you appeal to the masses to help raise money. You don’t need to go into immediate debt and although your backers will certainly want something for their troubles (think merchandise, free advertising or credit), most aren’t going to demand a percentage of your company.
Crowdsourcing won’t buy your business for you, but it can help you to develop a prototype, raise funds for manufacturing costs and even help defray operating costs in some situations.
Grants can also be a huge plus for aspiring entrepreneurs. Offered at the federal, state and local level, this is free money to help you get your business off the ground. Grants don’t need to be repaid and are available for any stage of the company’s growth. Even established corporations can receive this money.
The competition can be stiff and you’ll need (you guessed it!) a solid business plan once more. You’ll also need someone skilled in grant writing -- a process that can be incredibly tedious and time-consuming.
You might need to apply for dozens or even hundreds of grants before you hit paydirt, so this method of funding isn’t for someone who needs cash quickly. For the patient, however, grants are as good as … well, money in the bank!
Show Me The Money
Choosing the right source of funding for your business isn’t quite a walk in the park, but by planning ahead, understanding the numbers and considering all your options, the funding will come.
It takes money to make money. Whether you choose debt or equity, long-term loans or short-term credit, or even if you explore grants and crowdsourcing, you’re already on your way to success.
Emma Siemasko is the content marketing specialist at Grasshopper, the entrepreneur’s phone system. She loves providing resources for entrepreneurs and small business owners, especially in design. She is the author of JUMP: The Ultimate Guide to Starting and Growing a Business.