When starting a new business, the subject of how much cash you need always comes up. Unless you have experience working in that industry at a senior level or you’ve run a business before, it’s challenging to be altogether accurate with estimates in the early few days, weeks, and months.
The reality is that raising funds is a bit of a moving target because you don’t know what you’ll need. Being unsure about when the business will achieve profitability and stop hemorrhaging cash is a difficulty too because it affects how much money is required to avoid running out too soon.
Let’s look at the ways to raise money for a new business.
When you have your own investment portfolio that you don’t wish to sell due to tax implications, you may find that adjusting your portfolio to high dividend paying stocks is a good way to generate cash to put into the business. Certainly, it will be a steady stream of cash dividends rather than a lump sum, but it can still help balance the cash flow when the business income is in its infancy. The dividend mantra site is a useful one to learn how to find good dividends stocks that pay a high, sustainable stream of dividends, often on a monthly basis.
Friends & Family
Friends and family are sometimes willing to invest in your business when you can show that you’re serious and have a proper business plan. The level of investment is likely to be between $500 and a few thousand dollars. Occasionally, a deep-pocketed family member might consider a five-figure investment, but it’s likely to come with their need to see the books and maybe even work inside the company in the evenings or weekends to watch over their investment.
Small Business Loan
A small business loan is a structured loan agreement between the bank and a business. The loan will either be unsecured or secured against a residential property to protect the lender. When security is provided for the loan, the interest rate is usually lower and the amount that can be borrowed is increased.
Of course, as with any borrowing facility, it is difficult to know how the business will perform, enabling the timely repayment of the loan and keeping up with monthly payments before that time. It is sometimes desirable to take out an initial smaller loan and then the second one later when the funding needs are clearer.
Angel investors are individual wealthy people who have previously made money with their own businesses (in most cases) and are looking to buying into startups and newer businesses. They are a stepping stone before venture capitalists come along and are often found investing in the early stages before a VC company puts in a later round of capital in exchange for an equity stake.
The typical angel investor will want to see inside the business, make operational recommendations in some cases, and be far more hands-on than a bank with their loan. Sometimes they’re looking to leverage their industry knowledge to help guide the business to profitability. This level of involvement may or may not be desirable for some entrepreneurs who prefer a silent equity partner.
Finding ways to fund a business is sometimes about getting trickles of income into supplement the initial business income and other times about getting lump sum loans or investments where you’re giving up an ownership stake. It is up to the entrepreneur to weigh up what is best for their business.