7 Ways to Find Money to Make Your Business Idea a Reality
So you have this wonderful idea, but you don’t have the funds to make it a reality. How are you going to raise that money? The adage “You need money to make money” is, unfortunately, almost always true.
Small firms and sole entrepreneurs require funding during critical stages of development. The most prevalent reasons for small business entrepreneurs seeking investors are startup finance and capital to go to the next level.
Securing an investment speeds up your business decisions by increasing your bank balance. An investor can also provide additional resources, like a fresh set of eyes and a whole other business brain focused on your company.
Here are the top seven methods for finding potential investors for your small business:
1. Family and Friends
Family and friends are the most obvious source of startup investment. It is the most basic. You don’t have to go through the often difficult processes associated with other kinds of financing. One key advantage is that you may be able to acquire more money upfront and will not have to pay it back in installments.
Your friends and family, like any other investors, will only see their money returned if your firm is profitable. Remember that this is still a commercial venture. They have a stake in the company and are now exposed to some risk as well. They may also have some decision-making power, depending on the size of the investment.
Be careful to pitch your idea as if it were to an outside investor. Present your company plan and provide an estimate of when they might expect a return on their investment. Explain all the risks involved if they are new to investing.
There is an obvious disadvantage to combining a personal and professional relationship though. This is more than simply a financial risk. Before you try to raise funds from friends and family, you should thoroughly consider the worst-case situation. There are probably alternative options for raising funds. Your friends and family cannot be replaced.
2. Networking in Your Field of Work
Prospective investors can be found everywhere. All you have to do is look for them carefully. Networking opportunities are not limited to new businesses. You may meet other established and successful entrepreneurs who are the ideal investor for your company.
Other Companies, Former Colleagues, and Professionals
Chances are, you already know people in your industry, and they may be among your LinkedIn contacts. Perhaps you can contact them to ask if they have any recommendations for potential investors in your company or idea. Attend industry trade events with your investment pitch prepared.
This research procedure may consume a significant amount of your time, as you are unlikely to discover eager investors with a single phone call, email, or message. To network, you may need to contact a large number of people or attend business events. But if you keep looking, you could just meet someone who likes your business strategy or product enough to invest in it.
Schools
Schools that provide certificates, diplomas, or degrees in your field of work may also be a good approach to reaching out to potential investors. This is because the instructors who teach the programs frequently invite guests to lecture on specific topics. These guests are usually specialists in their industry. Perhaps you can ask the lecturers or someone in the department to contact these people on your behalf and arrange an encounter.
3. Crowdfunding
Crowdfunding websites are internet platforms that assist entrepreneurs in raising capital. Individuals and businesses can launch crowdfunding campaigns to attract a large number of investors. The project initiator who presents the idea or project to be funded, individuals or groups that support the concept, and a regulating organization (the “platform”) that brings the parties together to launch the proposal are the three actors in the online crowdfunding paradigm.
This is a modern approach to attract investors who will provide the initial financing to get your new business off the ground. People who are passionate about a new product or service might contribute to startup funding. Each crowdfunding campaign has a set goal that must be met by a specific deadline. Otherwise, you will not receive any of the monies provided.
Being listed on crowdfunding websites is not an easy process, but once there, the risks for the initiator are negligible, and the potential for raising sufficient funds for your project is enormous.
The following are some of the most common types of crowdfunding.
Reward-Based Crowdfunding Platforms
Contributors are requested for tiny sums of money in exchange for some form of benefit from the firm.
Haro380 on Kickstarter, for example, is a 6-axis industrial robot arm that is small enough to put on your desk. It has everything an industrial robot has: high accuracy, a large payload, and no backlash. It promises to be more cost-effective and compact than traditional industrial robots and to offer better precision and payload than traditional classroom robots. When the device launches on the market it will have a retail value of $7,900. A Super Early Bird investor who pays $3,599 now will get the product with basically a 54% off.
This is a win-win situation. You are getting the money you need now, and if the business is successful, the investor is receiving a wonderful deal. You also retain full control of your company.
Indiegogo and Kickstarter are two examples of reward-based crowdfunding platforms.
Peer-to-Peer Lending (or Debt-Based Crowdfunding)
Peer-to-peer lending facilitates loans by connecting people or enterprises in need of funds with investors.
Applicants complete an online form, and the peer-to-peer lending platform delivers a credit score to potential investors, who may then decide whether or not to contribute money.
The investors get their money back plus interest every month. In this sense, they do not own any of the firms to which they lend money. The most straightforward similarity is that of a bank loan, except that the borrower pays less interest than would normally be paid back to a bank, and the investor earns a bigger return than he would have earned from a standard savings account or other bank investment product. However, there are clear risks with this practice, because the investor’s money is not safeguarded by the government.
Lending Club and Prosper are two examples of peer-to-peer lending platforms.
Equity Crowdfunding
This is a sort of crowdsourcing in which investors acquire some ownership of the firm, generally in the form of shares. Although their initial investment is not repaid, they will receive a portion of the revenues if the company succeeds.
The sums involved are not insignificant; they often begin in the thousands. The rewards can also be substantially higher than with traditional investment, but equity-based crowdsourcing is riskier because there is no guarantee of return. In the early stages, startups often do not pay dividends or interest, and there are fewer legal safeguards. This is a better alternative for a larger organization.
Crowdcube and OurCrowd are two examples of equity-based crowdfunding platforms.
There are other crowdfunding platforms adopting other models. For example, GoFundMe is distinct among crowdfunding platforms in that it is not an incentive-based crowdfunding platform. Although it allows projects to support other projects like musicians, inventors, and so on, the business model is set up to allow donations to personal causes and life events such as medical costs. GoFundMe also has a section dedicated specifically to people raising funds to support their college bills. A well-known tuition effort assisted a user in raising $25,000 for out-of-state tuition to a Ph.D. school. A tuition project in 2014 garnered more than $100,000 to help a homeless high school valedictorian attend college and support his family.
4. Small Business Loans
When it comes to capital, a small company loan may be the best alternative.
The obvious first place of call is your local bank. You’re more likely to succeed if you’re a more established company with a proven track record of growth. Banks require considerable financial information before approving any loan application. So be certain that your paperwork is flawless.
The Small Business Administration, or SBA, is a US government organization that assists small businesses.
Although the SBA does not lend money, it does provide a lender match tool on its website to help firms discover lenders who have already been vetted by the SBA. Certain administrative loads for small businesses are assured, with generous payback terms and lower interest rates.
Looking online, there are several companies offering small business loans in a short time frame. Before trusting anyone, do your homework, read the fine print, and select the scheme that is more right for your own case.
The major disadvantage of a business loan is that you will have to repay it in installments, regardless of how well your business succeeds, and most likely with interest.
5. Small Business Grants
In the United States, a wide range of state, federal, and nonprofit grants are available. The eligibility requirements are all different. Some are tailored to entrepreneurs, startups, or small businesses in particular. Others are exclusive to specific industries or are intended to help a specific group of people (such as people below a certain age or female entrepreneurs or veterans or people with disability).
On the other side of the Atlantic, the European Commission awards funding to projects or organizations that further the objectives of the EU. SMEs and other interested parties can apply by responding to EU funding program calls for proposals. It also purchases goods and services through public contracts. Calls for tender are used to select the providers.
In some circumstances, resources and mentoring are provided in addition to the money.
You are not required to repay a small business grant. However, you must be very specific in your application to ensure that you meet all of the grant-qualifying conditions.
The SBA provides grants and is a fantastic location to start your search. Federal funds can be found at funds.gov, while state and federal grants can be found at USGrants.org.
6. Angel Investors
Angel funding is provided by rich individuals who are also skilled investors. They frequently hunt for investment opportunities in the early phases of a business and invest their own money. Angel investors, in general, want growth potential to achieve a good return on their investment.
When you bring on an angel investor, they will likely give enough that no other investors are required. This keeps the equity split clearer than if you have a large number of investors. These private investors frequently fund projects with which they strongly identify. However, your company plan must be watertight—you must know your figures.
Any angel investor is likely to want to be involved in the day-to-day operations of a company. That implies you’ll have another expert working on your company. However, it also implies that you must be willing to give up some control.
Begin here to locate angel investors who are a suitable fit for your company:
- Angel Investment Network: Over 300,000 potential investors gathered in one place.
- Angel Capital Association: Provides a list of angels by state.
- Pipeline Angels: Funding for women-owned enterprises
7. Venture Capital Firms
Venture capital is provided by venture capital firms. These businesses are funded by limited partners. The venture capital firm then makes its investments in carefully picked small firms. In exchange for their investment, they want equity and a say in the direction of your company.
Venture capital funds new enterprises that do not have access to stock exchanges and do not have enough cash flow to incur debt. This arrangement can be mutually beneficial because firms obtain the funding they need to get started, and investors get shares in promising enterprises.
To be successful with this objective, Venture capital firms attempt to invest in companies that have the potential for rapid growth. The ultimate goal of venture capitalists is to grow your company to the point where it can be purchased by a larger organization or go public. This is vital to note while seeking financing because it may not coincide with your business goals.
A venture capital firm is a step above other sorts of investing. You won’t need them until your company has grown and is ready to expand, possibly into a riskier enterprise. If you have a game-changing transformation plan and need money to make it happen, now is the time to hunt for interested venture capitalists.
However, venture capital firms do occasionally invest in businesses, so don’t rule them out.
Typically, venture capitalists make substantially larger investments than angel investors. They have millions of dollars to invest. However, only if they expect a large return on investment.
Other Concerns Regarding How to Find Investors
What Qualities Do Investors Look For?
When considering whether to put their money or the money of their company into another business, investors consider a variety of factors. Examples include:
- A unique concept or product. Is the product or idea one-of-a-kind? If not, are the features distinctive? If not, why is this going to sell?
- Excellent business plan. Do market research and product execution make part of the plan?
- Experience and education. Is the management staff educated and experienced enough to attain the goal?
- Financial information. Are cash flow, expenses, profitability, and projections in good standing?
Expect to have to explain your project in detail. The devil is in the details after all. Anything can bring up or down a potentially good idea. Your investors will expect you to answer all of their questions concerning your business plan and performance. You must be prepared to discuss your shortcomings and vulnerabilities, as well as your successes thus far. This gives the investor faith in you as the founder and increases their likelihood of trusting you with their money.
It would help if you had your balance sheet and income statement ready. You must be able to describe precisely what you intend to do with the funds they are investing. They’ll also want to know how they’ll withdraw their money from the company when the time comes.
What Is a Reasonable Return on Investment?
The percentage of a company’s ownership offered to an investor is frequently proportional to the amount of money that an investor is willing to put into it. Because every firm has so many different variables, determining a percentage with a simple formula is impossible. Every transaction is unique. Keep in mind, however, that if the proportion is too low, the capital investment will not be worthwhile to investors. Offering 5% to business investors is likely to be ineffective because it provides them with little return even if the company is profitable. It will also take them a long time to return their initial investment, much alone begin to profit.
What Type of Investor Do You Require?
It is difficult to find investors. Finding the best investors for your scenario is even more difficult. Do you require a business partner, venture capitalist, or crowdfunding? Or it could be something else. Do you need an investor at all? Whatever selection you make, you must conduct thorough research on any people or corporations investing in you. Examine their previous investments and track records. How involved do they wish to be in your business? Can they add value beyond funding by leveraging their networks or expertise? Investing is a two-way street and a relationship that might last years, so determining how that relationship will play out is of paramount importance.
Mistakes in Startup Capital Raising
There are various mistakes that can be made while raising startup funding that might make it difficult for banks or venture capital firms to invest in your business. There are mainly three types of blunders committed when raising startup capital: inadequate planning, wrong structuring of the agreement, and bad money management. These are the main reasons why entrepreneurs’ loan and investment applications are often denied. By avoiding these missteps, you will have a much better chance of getting your business funded.
Inadequate Planning
Some entrepreneurs believe that excitement and passion are sufficient to establish and sustain a firm. Unfortunately, if you are seeking startup financing, investors are searching for more than just the right mindset; they are also looking for a thorough and sound business plan.
You should be prepared with your business strategy when meeting with bank or venture capital personnel. This would demonstrate the significance of the venture. Nothing is more damaging than an applicant submitting an application with an unfinished business plan.
You would need more than simply money; you would also require management abilities. Another common blunder is failing to consider the managerial parts of the firm. When a bank loan grantor or venture capital investor meets you, they are searching for how you will return their money and investment. Nobody can be successful without the assistance of others. You’d have to hire the greatest staff possible.
Putting the Agreement Together
According to surveys conducted by US Bank, there are small firms that fail because they start with a modest quantity of money. The majority of entrepreneurs that apply for startup funding request an amount based on their company’s best performance. It is critical to assess the exact quantity you will require in the worst-case situation.
Others might make the error of not paying close attention to the legal agreements. If you are unsure about dealing with angel investors or venture capital firms, it is preferable to hire a lawyer who has experience with these types of agreements. This ensures that the terms do not take advantage of you or your company.
Managing Your Money
The key is proper management. It is inevitable to have problems, but conquering them is critical. Some entrepreneurs will start a business simply because they are enthused about it, but once they face a challenge, they will abandon it totally. When faced with a business crisis, some entrepreneurs choose to keep it to themselves.
That is not something you should do! Seek out those who can assist you. Of course, there are mentors available to assist you with your business challenges. Asking for help or advice is not a show of weakness; rather, it is a sign of recognizing your flaws and attempting to overcome them.
You do not need to construct a fortress around your business; community involvement can help you make new business relationships while also passing on your blessings and knowledge to others.
Startup financing provided by various institutions will greatly aid your business enterprise. But obtaining finance is not enough; what happens with the money after it is in your possession will determine the fate of your business. Startup financing is only a boost for your venture.
