Small Business Idea

Small Business Funding 101: The money needed to finance initial start-up costs, new product development, and infrastructure set-up.

Basic Assumptions: You’ve already got a good idea, a business plan, and a schedule of how much time it will take to become profitable. Now, you just need the capital to get things started and/or upgraded.

Primary Small Business Funding Options:

1. Self-funding
2. Raising capital privately
   • Official private investment options & angel investors
   • Less official private investors
3. Raising capital publicly
4. Government grants

Pros and Cons of Small Business Funding Models:

1. Self-funding (funding the business with personal savings or exclusively using profits to fund expansion) has a major pro and, depending on your business, a considerable con.

• The pro is that you own your business 100% once it becomes a success, having used no-one else’s money in getting it going. In other words, you won’t have anyone asking for their share of the pie once the pie gets tasty.
• The con is that, depending on the depth of your pockets or the initial profitability of the company, you may not have much money to grow your marketing budget or pay expenses (including yourself) as quickly as you’d like.

Personally, I recommend self-funding for all of your businesses, with a heavy emphasis on keeping expenses (and your personal risk) at a minimum. Nothing trims excess spending or quells a bad business idea better than a shoe-string budget of your own money. However, this model assumes that your business can scale from a potentially small start to larger success, which is not the case for every business (although, I’d argue, it is true for almost all of them.)

2. Raising capital privately (official sources such as angel investors, or venture capital; unofficial sources such as Grandma, a bank loan or credit card balance, or asking 5 friends to each chip in $_____ ) gives you a potential pro, a potential huge con, and an guaranteed additional level of complexity.

• The pro is that, given a lump of money to begin with, you can address expenses with immediacy that may be critical to a successful launch of your business. Common expenses may include research&development, staffing, supply chain, marketing, insurance, administration, a personal allowance, etc.
• The cons are multiple. As soon as you start to spend money, you start to owe money that may or may not ever be recovered. Regardless of whether its Grandma, the bank, investors or shareholders, this can get very complicated if anything goes sideways. (And 9 out of 10 business ventures go sideways.)

  In addition, people who lend money typically want something in return: either interest on the investment or a percentage of the company. Beware of building a business using other people’s money, only to discover down the road that “your” business is really making money for someone else!

3. Raising capital publicly (becoming listed on a stock exchange) is much too complicated for the average small business owner to contemplate. Whether going public via an IPO (Initial Public Offering), merger, or other process, if you’re new to this ball-game, simply sit it out. By funding your small business in an alternate manner, you can still go public later on. For now, simply pretend this option doesn’t exist.

4. Government grants (different for every country and region within countries) have a pro and a hidden con not many people realize.

• The pro is, typically, free money given by the government under the assumption that, somehow, your business will aid society. Common grant types include “public investment” in technological development, environmental technology (a hot topic), military development, and social programs.
• The con, which comes as a surprise, is the amount of paperwork and administration required to possibly receive the grant. Even when a grant comes through, many companies would have been better off on a $/hour basis doing something like working at McDonalds. While this is not so for every grant, the allure of “easy government grants” is one that may or may not be a good use of your time.

Summary: Choosing a method of funding your small business is an important step. Getting it right (and not getting yourself in a big hole) can make the difference between business success or huge failure!