How To Finance A New Business From The Ground Up – There’s a lot to be excited about when starting a new business, but there are also a lot of duties to complete. If you need financing, then one of the first things you’ll do is consider how to finance a new business. We will cover standard options, compare debt financing, equity, and mezzanine financing, and will answer some of the most frequently asked questions people have about financing a new business.
DEBT FINANCING VS. EQUITY VS. MEZZANINE FINANCING
It’s essential to understand three basic categories of financing to Finance A New Business From The Ground Up: debt financing, equity, and mezzanine financing. None are necessarily better than another in all circumstances, but one can be significantly better for your new business enterprise in some cases.
Debt Financing 101
How To Finance A New Business From The Ground Up – Debt financing involves raising capital by selling debt to investors. In return for giving you the money, they become creditors and receive payments for principal and interest. There are several advantages to this option:
- You can potentially leverage a small part of overall capital to grow or start a business
- Most debt payments are tax-deductible
- You retain 100% ownership control
- It can be more affordable than other options, including equity financing
Of course, there are disadvantages, too:
- You must pay interest on the loan
- You are required to make payments regardless of your new company’s revenue
- It is a risky choice with the inconsistent income a new company generally experiences
Equity Financing 101
The process of equity financing involves raising funds by selling shares of the company. This essentially means that you would be selling part of your business in exchange for start-up capital. The main advantage of this option is that you do not have to repay the money and therefore do not start your new company out in debt.
On the other hand, you will be starting your company without having 100% ownership of it. This requires that you share your future profits with investors for as long as you own the company. Depending on the equity financing agreement, you might also be required to get approval from investors to make decisions about your company’s future.
Mezzanine Financing 101
Essentially a cross between the two options above, debt financing and equity financing, mezzanine financing gives creditors the option to convert the money they are owed to equity in the company. It is generally used by established companies rather than to gain funds to start a new business. Some companies use this option to fund specific projects, and these types of loans are most common in expanding a company or during the merger of a company.
FUNDING A NEW BUSINESS OFTEN INVOLVES PULLING FROM SEVERAL SOURCES
How To Finance A New Business From The Ground Up – While some new business owners will pull funds from a single place, it is much more common to pull funding from several places. The good news is that there are many common ways to fund a new business and the suitable options for any particular business depend on:
- The industry they are entering
- Their credit score
- Their business expertise
- The amount they need to borrow
It is wise to explore all potential ways to fund your business to ensure you have not overlooked a potentially lucrative option.
Personal Savings
For most start-up businesses, the best possible option is to use your personal savings. Known among financial circuits as “bootstrapping,” this option means that you do not owe any debt when you start up, and your company is 100% yours. That said, it is a very risky situation when your entire personal wealth is tied up in the new company.
Credit Cards
Starting a business using credit cards can be a great way to earn exceptional perks with the right cards, but it can also be a great way to get into significant debt with high-interest rates. Generally speaking, this is an option to consider only if you expect to be able to pay the credit cards off monthly. If you can, you could earn miles, reward points, or cash back to further the growth of your business.
SBA Microloans
The Small Business Administration offers several small business financing programs, but microloans are the best option for many start-up companies. They can provide up to $50,000 in capital to start or grow a company. They can be a good option for those who do not need more than this amount to start a company, and they generally come with competitive interest rates.
Crowdfunding
If your business is something you think is new to the market and people will be excited to support it, you can consider crowdfunding. This allows you to get small investments from potentially millions of people. It’s also a great way to increase awareness of your brand and your product.
You start by providing a business plan that details what you need money for and how it will be used. Potential investors can review the proposal to decide if they are interested in investing. Most of these platforms are rewards-based, meaning that you would offer various rewards for different levels of investment. The rewards typically involve the product or service your new company will offer.
Business Loans & Lines Of Credit
The more traditional ways to financing a new business are taking out business loans and lines of credit. There are many options within these categories, from short-term loans you pay off in a manner of months to loans that can be paid off over the next ten years, to development loans and even loans designed explicitly to finance the acquisition of new equipment.
It can be difficult for a company to qualify for a business loan when they are just starting, but business lines of credit are often a little easier. While a business loan involves one lump payment, lines of credit are similar to a credit card in that you have a certain amount of credit you can draw on for your business, and as you make monthly payments to pay down money you have already used, you can take out further credit for future expenses.
Lines of credit can be a great flexible option for companies just starting out, with the added advantage of interest only being charged on the credit line actually in use.
6 Strategies to Build Your New Business From the Ground Up
Starting a successful business takes three things: a good idea, the right amount of capital, and creativity.
However, while many entrepreneurs have those tools, they lack the patience and tenacity to actually see the business through to success. After a few obstacles, account losses, and financial struggles, many entrepreneurs quickly give up in order to avoid catastrophic failure.
While the early stages of starting a business can be overwhelming, especially if this is your first solo venture, there are proven strategies you can follow in order to stay motivated, determined, and on track to seeing your business startup begin to grow.
Here are six strategies to building your business from the ground up:
1. Think through every aspect of your startup
A great idea needs a backbone and foundation to stand on. And, you need to be able to articulate that foundation to possible investors.
Think about every aspect of your business plan: target audience, competition, your company’s goals, and marketing strategies like email campaigns, social media, and advertising. Think about the questions investors might ask you about each of these aspects of your business.
Having solid answers prepared to these questions not only gives you a tangible, fully formed picture of your business, but it also paints a picture for investors. Even if an investor sees potential in your idea, if they cannot see potential in you as a business leader and innovator, they will not be willing to invest in your business. If you cannot answer their hard questions, you will not be able to sell your idea to anyone else.
2. Draft a solid business plan
The next step is to have a physical, working business plan. This guide will not only help you as you proceed, but it also gives potential investors or partners a concrete map of your business goals.
As the U.S. Small Business Administration notes, the main parts of a business plan need to include an executive summary, a description of your company (your brand and what makes it unique), market analysis (i.e., the target audience and competition), company structure, marketing and sales strategies, and financial projections.
As you have already brainstormed these ideas, putting it to paper should not be an issue. In fact, it will help to cement the idea into your mind.
3. Invest upfront in the resources you need to get started
What resources do you need to operate your business? Do you need physical office space, office equipment like computers and printer, and office supplies? Determine your needs upfront and invest in them. Regardless of how small your business is, you still need to produce a quality product. Many new business owners make the mistake of offering lackluster products during the opening stages of their business because they are waiting to expand before purchasing more expensive resources.
While there is a fine line between quality and irresponsible spending, it is important to provide your customers with the best product possible, otherwise your business won’t expand.
More and more businesses have been forced to go completely virtual due to the Covid-19 pandemic, and investing in physical office space for your business may no longer be the necessity it once seemed to be. There are great digital tools to help you run a remote company, and many business owners are even conducting virtual employee interviews to bring new staff on board.
4. Invest time and energy in marketing your new business
Marketing is one of the most important business growth strategies. Unfortunately, it’s also one area in business that’s often either ignored or skimped on—this is a critical error. The only way to grow your business is to grow the awareness of your business in the market.
Implement the marketing strategies you mapped out in your business plan. Make sure your business has a website. Set up a blog on your site and post regularly. Attend tradeshows and industry events (even if virtual ones for now). Create a Facebook page, Twitter profile, and LinkedIn page. Start advertising your company in the appropriate channels. Don’t underestimate the power of marketing.
Marketing is a broad topic and there’s a lot to learn. For more advice on how to get started, read How to Create an Integrated Marketing Strategy for Your Small Business.
5. Hire an accountant
Once your business begins to grow, spend the money to hire a professional accountant to keep your company finances organized and in good order. While you might be capable of keep the finances on track in the early days, as the company grows, so do the financial side of things. One of the worst obstacles a new company can run into is a legal problem with their finances. Hiring an accountant will ensure you are in the clear.
6. Set goals for the future
Be sure to set goals for the future of your company. It will help to propel your business forward into success.
Starting a business is an exciting venture. Don’t allow feelings of being overwhelmed or unprepared stop you from achieving business success.
FREQUENTLY ASKED QUESTIONS ABOUT HOW TO FINANCE A NEW BUSINESS
Are there additional questions you have about ways to finance a new business? The answers are likely below.
Q: What Is The Best Way To Finance A New Business?
A: As you can see from the above-described options, no single option works for everyone. Each type of financing has its unique advantages and potential drawbacks.
Q: Are There Different Types Of Equity Financing?
A: Yes. Selling equity in your business to private investors or venture capital firms is the most common option for a new business, but public stock offerings are another form of equity financing a company might use to increase its available capital.
Q: How Much Funding Should I Get For My New Business?
A: One of the biggest mistakes new companies often make is assuming that they should take advantage of the maximum amount of capital offered to them. This is not always the case. It is crucial to draw up a business plan and have a realistic idea of how much it will cost to get your business started. You will also need to consider additional funds you might need before your business becomes profitable.
If you take out more funding than necessary, you will end up with higher payments or financial obligations. Getting into unnecessary debt is a common way for a new business to fail.
Q: What Do I Need To Provide To Apply For Start-Up Funding?
A: That depends on where you are applying for funding and their requirements. With new companies that have not established business credit, it is common for loans to require personal credit guarantees.
Q: What Is An Angel Investor?
A: This is another term for equity financing. In exchange for offering you start-up capital, an angel investor will receive a percentage of equity in your company. Depending on how the agreement is written, you might be able to repurchase your equity at a pre-agreed upon rate after a certain period of time has elapsed.
Q: How Hard Is It To Get A New Business Funded?
If you have never run a business before and are attempting to start a company with an unproven concept, you will likely find it challenging to get funding. If you are an experienced business person with a solid business plan and are starting a company based on a proven concept, then you will likely have a much easier time.
