March 6, 2019 | By Peyton Sawyer
As an entrepreneur, you may have lots of good ideas all the time, but it can be hard to choose just one great idea that's really worth taking a chance on. The problem is in convincing others that the risk is worth taking.
Turning your idea into something tangible will take money. If you don’t have the start-up cash to take your dream into reality, then you may need to seek an investor or funder that can see your vision. But that can be easier said than done.
Finding the funding to help build your new business is not always so simple. Opening a new business will take more than just an idea; it takes a solid business plan, research, knowledge, and the resources needed to succeed. Whether those resources are available to you because of your hard work and the funding options open to business owners, or an investor that has agreed to back your business idea, you need to make educated decisions that really benefit your business.
When money hasn’t started rolling in yet, it can be difficult to create a good product or service. That's why so many small businesses are looking for the funding they need to get up and running. Taking the time to consider all of your funding options is important when opening a business. Here are some ways you could get the funding you need for your new business.
Before Seeking Outside Investors
Tapping into other resources may result in the business funding you require.
Before turning to an outside investor for funding you might want to consider a few other options first. Bootstrapping is one option. Bootstrapping means that you would try to raise money on your own without the help from an outside investor. An entrepreneur using this method may keep their full-time job, or quit their day job to embark on their new adventure. Tapping into your savings and relying on family for money is an example of bootstrapping.
New business owners do this to avoid giving up any control in their business. Yes, investors can make the process of opening a business easier, but at what cost? How much of the business or decision making process would an investor have? Using an investor can often alter or confuse the business idea you have created.
If bootstrapping is not an option for you and your business, then you should start to consider other options.
Learning About Equity
Having some knowledge about the different types of equity may work to your advantage.
Equity funding is when a business owner sells shares of their business to outside investors. This enables business owners to access the startup cash needed to get their business off the ground. This type of funding would entitle the investor to a portion of profits made, and could a good option for sole proprietors that need funding.
Equity compensation is when a business owner offers company employees a percentage of profits in exchange for lower wages or in lieu of a salary. If you have already afforded the physical capital needed, but are in need of human capital, this may be a good option for your business.
Instead of giving an outside investor a piece of your pie by giving away a portion of your business for investment money, you can provide a royalty percentage. This type of funding does not give away any ownership. It's a source of funding that provides the investor with a percentage of money based on growth. You may be familiar with this type of funding option if you know a little about the music or film industry. Artists and actors are often paid a royalty every time their song or movie is aired.
Types of Investors
Not all businesses are created equal, and the same goes for investors. If funding your business in the ways listed above won't do, here are some different types of investors and the pros and cons of using them.
While finding an angel investor may make the difference between the birth or death of your business idea, they are not always to the benefit of your business in the long term. Many entrepreneurs lose sight of why they became entrepreneurs in the first place. It may start with an exciting idea you had for a business and turn into something different.
Are angel investors angels at all? Often times new business owners are guided in a direction that isn't really their own in order to receive the money they need. Allowing an outside investor to take part of your business and possess the power of suggestion can contaminate your original idea.
Investors with Connections
This type of investor may already be wealthy, and isn’t using angel investing to generate more wealth. Often times, these investors have found a way to climb the ladder to success in a particular industry, making connections along the way, and would like to share their experience. Having a clear passion for the industry in which they work, they are prepared to share not only funding but also wisdom. An investor like this has something money can’t buy: respect in the industry in which you are trying to be a part of. This may be the best investor for you if you are trying to break into a difficult industry.
Investors Looking To Pay It Forward
This type of investor may have conquered their industry, making more money than one can spend in a lifetime. The only reason they have invested is that they can. Their decision to fund a business may be less of a selective process than other investors. They may be looking to give back or even have another tax right off. If you prefer little to no involvement from your investor, and would like to make your own way with no guidance, then this type of investor may suit you just fine.
Investors That Are Money Hungry
This type of investor may only invest for their own gain. While the object for all business investors is to make money, this type of investor may only see the bottom line and not the process needed to sustain the success of a business. They are often over-involved in the day to day operations, and tend to pressure you for the wrong reasons. Attaining their financial goals is their top priority.
What Kind of Funding Is Right for You?
If an outside investor is necessary, make sure to find the right one. There are a few different out there. It’s your job to figure out what one will work best for your business.
Possessing the knowledge needed to make a good business decision is the key to success. Take the time to understand your funding options before you commit to a financial agreement. Best of luck on your new business venture and getting the funds you need to hit the ground running!