How To Fuel Your Start-Up Business
What does it take to start a business? Aside from a great, big idea and deep passion, you would need funds to get it started. Funding a start up business continues to be a need of budding entrepreneurs who would like to start a business especially those who are shifting from employment to entrepreneurship.
There may be fears of not being capable to do so because of lack of capital to start with. However, at this day and age, there are already many creative ways to get funding for a start up business.
But before you, as a budding entrepreneur, begin to raise money for your business, there are many things that you will need to consider. It is not enough that you have the business idea to start, then go out there right away to ask for funding. It is important to be guided by the following questions and include it in your business plan.
I would like to emphasize the importance of being very clear about the kind of business are getting yourself into. Knowing the kind of business you want to get into will allow you to measure what is needed, from the necessary manpower, the facilities, the work flow, and the necessary funding to launch the business and make it operate well.
Ask the following questions first:
- What is the nature of the business? Will the business be selling products or services?
- If the business will be selling products, will the business be into manufacturing or assembly of products, or will it just be trading products? What kind of materials or goods will be needed in order to manufacture or trade the products?
- If the business will be selling services, will the services be held in the place of business, or will it be held outside the office?
- How many people will be required to run the business?
- Where will the business hold office? Will it be a virtual office, at home, at an business district or establishment, or at the mall? Will it require satellite offices or branches and/or warehouses? Will the business be renting?
- What facilities will the business require in order to operate such as computers, communication devices such as internet and mobile phones, vehicles, office furnitures and fixtures, etc.?
- How will the business operate?
- If products, will it require inventory from the beginning? Will the items be paid right away, in terms or via consignment basis?
- If manufacturing, how long will it take the business take to produce the items for sale?
- If services, how long will it take for you to complete a service agreement? Is it one time, or recurring?
- How do you plan to go about sales and collection? Will you require downpayment, cash on delivery, or will you give terms of payment?
Many start up businesses fail because they fail to consider these important factors and end up having cash flow problems. Being clear about what you are getting into will allow you to make the necessary cash flow projections and determine the sufficient funding needed to make the business a success. After having a clear picture of what to get into, the next step would be to determine how much money will the business require to start and to operate. It would be best to consider expenses up until the 6 months to 1 year of operation.
It usually takes a while for start up businesses to succeed because during the first two years of operation, the business is still making a name for itself and promoting it to its prospective market. This is the phase that uses so much cash because there is more outflow than cash inflow. It is usually on the third and fourth year of operation when the business starts to make money. However, this is also the phase where the business is recovering the money invested during the start up phase, or starts paying investors and creditors. The business will start to enjoy the income benefits mostly on the fifth year when the business already receives the income and is not paid to creditors anymore.
There are different ways to fund a start up business, but let us focus on those that apply to our country and which can be applied right away. We will categorize them according to the following:
1) Funding through Personal Means
2) Funding through Debt
3) Funding through Investors & Partners
Option # 1:
Funding through Personal Means
This is the simplest and one of the fastest ways to fund a start up business because you won’t need to convince anyone else to fund the business but yourself. Since it takes a while for a start up business to operate, many investors and creditors are very picky when it comes to giving and lending money. This is mainly because they are calculating their risks and they are more likely to put their money into business ventures that have a higher guarantee of return, or at least recover the money that they put in.
As an entrepreneur, you may initially dip into your own pocket in order to fund the business by using your personal money to pay for the start up costs. One benefit of this approach is the fact that you are not indebted to anyone else, allowing you to take full risks in the business. Because you are fully accountable, you reap all of the rewards when the business succeeds. However, if the business fails, you must also accept all the consequences, and you may end up losing the money that you initially put in.
Sale of Personal Assets
In case personal cash is not readily available or is not enough, you may opt to sell some of your personal assets so you can fund the business. You may sell things that you no longer use but still have resale value. You may sell them online or hold a garage sale in order to do this. Some people sell their properties, their vehicles, their jewelries, gadgets, and/or collectible items to name a few.
Use of Current Income Source
Another way to fund the business through personal means is by using your current income to fund the business. If you are currently receiving a salary or commission, you can set aside a portion of it to use for your new venture.
Getting into Sales
You may also get into sales by trading products or services of others in exchange of commission in the form of cash. This is how many real estate developers and landlords started. Many started in the business as brokers or property agents, and they used the commissions and bonuses that they earned to buy properties which they sold for a profit or rented out.
Getting Orders First Before Buying the Products
You may wish to get paid orders from your clients prior to purchasing the materials or the products for sale, or require your clients to put up a down payment for their purchase. This will help make sure that your expenses are covered by enough sales. Of course this is dependent on the type of business that you’re in, but helps you buy some time and leverage on the client’s funding.
Option # 2:
Funding through Debt
This approach is also known as using Other People’s Money (OPM) or using leverage. Instead of dipping into personal savings, selling personal assets, or using existing income to fund a start-up business, borrowing money is a great way to start a business especially when your business idea is very promising and may generate great profits. If this is the case, then you may be off to a good start because you get to leverage on other people’s money to fund your business.
In exchange for the money borrowed, you pay the lender in the form of interest. You also get to spread your payments over a period of time giving you time to work on the business in order to generate cash to fuel the business. When it comes to borrowing money, it is important to consider your capacity to pay the lender and to make sure that the business has more than enough profits to cover the cost of borrowing.
Borrowing from Friends & Relatives
This is also known as love money. Friends and family members normally support you when you do something important, even though they have no guarantees on when they will be paid back or if they will be paid back at all. They lend you money with very low interest or no interest at all because of their love and care for you, especially if they believe in your business idea, and if your friends and relatives are also entrepreneurs who were also in your shoes some time ago.
However, this may not always be ideal because many relationships have been strained because of money problems. They may be the easiest people to talk to especially when you are negotiating for terms of payment, or when you request for payment extension, but many close knit relationships end up apart because of money problems.
Make sure that you pay them back, and even better with some interest. Make the transaction formal by coming up with a payment plan with clear payment terms and interest, and by drafting an agreement as well.
Using Credit Cards
Credit cards may come in handy when starting a business. When you’re in good credit standing, you may even opt to request for an increase in your credit limit or get additional cards. Please take note that using your credit cards to fund your start-up has its own advantages, disadvantages & limitations.
Depending on the type of business that you are in, you may use your credit card to fund the business, such as when you need services and supplies. Since many businesses accept credit cards as payment, it has also become a popular choice to many people, even for entrepreneurs.
I remember when I was still in the events management business, I am able to use my credit card to pay for the hotel venue that we will be using for the event. I am able to utilize my credit card as I spaced and budgeted the downpayment given to me by my client. I am able to use my client’s downpayment to pay for other suppliers who required cash as payments, therefore I am able to buy my company some time to collect the full payment of the project.
You may also use credit cards to buy facilities for the business such as computers, printers, scanners, office furnitures, appliances, among others. You can even avail of the 0% rates on installment allowing you to manage your cashflow.
Another benefit of using credit cards are the points or rebates offered by the card. There are also credit card companies who offer buy now and pay later schemes. This may be helpful for you as you are getting started.
However, the use of credit cards have some limitations which include the following:
- Credit card purchases that are not via installment basis are required to be paid on the due date. You may only buy yourself some time but this may not be beneficial when you are trying to space payments of big purchases.
- Not all suppliers accept credit cards as payment for the business transaction, for example manpower. May companies only accept cash or checks as payment.
- If the supplier establishment does not offer 0% interest, they charge very high interest rates on installment purchases.
- Most credit card companies offer cash advance options and it comes at a high interest rate ranging from 4-6% depending on the company. This amount is automatically charged during the date of the advance. For example, when you make a cash advance of P10,000 and the cash advance interest rate is 4%, then you are automatically charged P400 for the transaction. This amount must be paid on the due date.
Borrowing from Banks & Financial Institutions
Although this is another popular choice among entrepreneurs, banks and lending companies do not normally give out business loans to start-ups. Business loans are offered to established companies who have been operating for many years with a good credit history and who are in good financial standing, and to those who need working capital to bridge collections or to expand their currently profitable and stable business. In case you have an existing business, you may tap into this available credit to fund your new business venture.
But if you are just starting, there are other ways on how you can utilize loans from financial institutions to fund your start up. This is through personal loans. These loans have a fixed interest rate and normally have payment terms of up to 2-3 years depending on the company. Because rates have been very competitive, some offer as low as 0.88% – 1% per month.
You may also utilize bank loans when you are buying a franchise. Some banks have tieups with several franchising companies who have a proven success track record. If the company that you want to franchise has a tie up with the bank, then you may consider this route. However, the bank may not lend you the full amount. You will have to raise the required equity which is about 20-30% of the amount needed and the bank only finances the remaining 70-80%.
In addition to this, you also go through the bank screening such as background and credit check. It will be best if are a long time depositor of that bank, and if you can show proof of ownership of your assets such as properties and vehicles, which can help speed up the loan approval. Once approved, the bank will credit the money into your account and you may already start your business.
You may also borrow money from financial institutions and use your assets as equity. You may borrow against the title of your property or the registration of your vehicle. This type of loan is best especially when you are trying to raise a big amount of capital for the business. You may also use jewelries as collaterals, and they are commonly accepted by
pawnshops. However, pawnshops often have low appraisals of the jewelries and offer high interest rates.
Option # 3:
Funding through Investors & Partners
You may also utilize this option especially when you want your business to last long and when you want your business to be big. This route is normally taken by more experienced entrepreneurs who have established other successful businesses.
The idea of getting business partners have already evolved from just tapping into your friends and relatives into finding like minded people whom you don’t even know and partnering with them to fund your business. Looking for business partners requires that they, your partners, share in your passion for the business and can also help fund your business.
Angel investors are people who use their own money to fund start up businesses that are very promising. In addition to the funding that they will provide, an advantage of having an angel investor is that they also help guide you on how you can succeed in your business. In exchange, they ask for a portion of your profit or a certain return on the money that they invested which is normally about 20% or more depending on the partnership.
Because many start ups try to win the hearts of angel investors, your business idea must go beyond passion and trend. Your business idea must be geared for the long term and must be very promising in terms of profits. As the entrepreneur, you must have the management skills to run the business thoroughly. However, this is easier said than done because angel investors and venture capitalists screen many applications and only choose very few. To qualify, you must really have a great idea to get their attention.
There are several screening programs that are being offered by different companies, and if they get to choose you, you will receive the funding and their mentorship.
Venture Capitalists or VCs is the higher form of angel investors. Unlike angel investors who use their own money to fund start up businesses, venture capitalists or VCs use other people’s money to fund businesses. Because of this, the requirements of VCs in funding start ups are a lot higher and stricter. They may look into the same business presentation, but they are more geared towards the higher-end start ups, and their investments are in millions. They protect the interest of the people and institutions who have invested in them, thus they also become part of your business to also have a sense of control.
This is becoming more popular especially on the internet. This is where you get support from people you don’t even know through the web-based channels which you use as your platform to sell your product or service idea to get the necessary funding. The crowd funding website raises collective funds for your business from a large number of individuals who pledge small amounts of money.
Crowd Funding platforms give you a single venue to promote, showcase and pitch your business idea. Crowd Funding for start ups comes in two different forms such as rewards-based or equity-based.
Rewards-Based Crowd Funding require that those who pledged money to your business project are the first ones to get the actual product once it is ready. This is similar to advance orders of products. You may even customise your incentives to them by giving them additional products or bonuses.
Equity-Based Crowd Funding allow the contributors to have a share of your company and expect to be compensated in the form of financial returns, and eventually share in the profits. However, this has more technicalities because you will have to issue them shares of stocks of your company.
As compensation for their effort for bridging you to your “investors”, the crowd funding platform that you will use normally require about 5-10% fee of the amount that you’ve raised. It is important that you review the platform very well and be prepared to go global with your business because your investors can also be people from other countries.
Raising money for your business is both a science and an art. It requires that you take calculated risks and that you exercise creativity in choosing and utilizing the best options available. It would always be best to dream big, but start small. Put the money into the business in trickles and expand as you go along. Review and question every purchase, and make sure that you are making more than enough sales to cover your expenses. This way, you get to realize business success in the best and fastest way possible.