Even if you have a multi-million dollar idea, translating it into a successful business still takes a lot of work. There are many hurdles to clear, and they all present unique challenges. For many aspiring entrepreneurs, securing funding is the most challenging part of getting a business off the ground. In this article, we’ve detailed some of our top business funding for dummies tips. Check out those tips below and see how they can lead to sustainable success.
1. Identify Your Essential Expenses
The first step in business funding for dummies isn’t about securing money. You can start worrying about raising funds after determining how much money you’ll need to launch your business. You’ll have to identify your essential expenses to come up with that number.
Essential expenses should cover everything you need to operate a functional business. These expenses will help pay for your desired products and services. You may even need them just to operate legally.
One example of an essential expense would be the cost of your business insurance. Most forms of commercial insurance are not required by law, but specific policies are mandated based on the company’s composition and assets. Workers’ compensation and commercial auto insurance are among the policies businesses are often required to purchase.
Generally speaking, you will need workers’ compensation if you have employees. Meanwhile, purchasing commercial auto insurance is a must if you use a company vehicle. You may need to buy another insurance policy depending on your specific line of business.
Commercial insurance is just one of many necessary expenses you’ll have to cover. Working with a business lawyer, business accountants, and an architectural firm is also critical if you’re starting from scratch. They can help set up your commercial establishment as well as the structure of your new company. You should also check how much permits and licenses cost.
2. Consider Additional Expenses That Improve Company Operations
Essential expenses are necessary for getting your new venture up and running. However, you may need to pay for a few more expenses to tap into the full potential of your new idea. Skimping on these expenses will set your business up for failure.
Start by gauging the cost of business security systems. In this era of business, you must protect both your physical location and digital accounts. No matter what security solution you eventually decide to purchase, make sure it has both of those things covered. Anything less leaves your venture vulnerable to bad actors.
Another optional but very helpful expense to consider is related to hiring an IT management service. Unless you’re planning to run a small-scale operation for an extended period, you will need some form of database to maintain your business and employee records. Managing that kind of complex database can be an enormous challenge if you cannot devote your time to it. Leave that task to IT professionals to ensure it is appropriately handled.
You should be able to cover those additional expenses by leaning on tried and true business funding for dummies tips. Consider adding more expenses that are more specific to your line of business. Adjust your funding to account for them as well.
3. Clearly Define Your Funding Needs
Identifying your essential and supplemental expenses early on in the process is critical because you have to get a clear idea of how much starting your business will actually cost. You cannot start using the business funding for dummies tips until you’ve pinned down a solid figure for your starting budget. How do you come up with an ideal budget figure?
First, you should talk to suppliers, service providers, and agencies that will contribute to the formation of your company. Get solid figures for their products and services, then figure those costs into your expenses. Use the high-end estimates if they cannot offer exact numbers. That way, you won’t have to delay opening your business because the market is not operating in your favor.
Since you’re just getting started, it would also be wise to set aside money for an emergency fund. You can convert the leftover money in your operating budget into your emergency fund, but that won’t suffice. Purposely reserve money for an emergency fund because the early days of your business will likely have plenty of ups and downs.
4. Pour Personal Resources Into Your Business Venture
You know your expenses and have a budget in mind. With those matters sorted out, you can start exploring your funding options. Business funding for dummies tips are quick to remind aspiring entrepreneurs that they have assets that can be used to cover the starting and operating expenses.
Now is the perfect time to use the money you’ve set aside in your savings account. Even if you don’t take everything out of your savings account, that money can still cover plenty of your essential expenses. You can also tap into your retirement account and see how much funding is available from that resource. Reap the rewards of your consistent contributions and turn them into a dependable resource.
Using personal resources to fund a business gives you complete freedom. You don’t have to abide by any individual or entity’s guidelines because you’re not using their money. Then again, relying solely on personal resources for funding can set a low cap on your starting budget. The money you worked so long to save may also disappear in a matter of months if your business fails to deliver the expected results.
5. Borrow Money from Your Family and Friends
Many caution against mixing your personal and business affairs because they believe such a combination can lead to unnecessary stress and additional complications. There’s no denying the risk involved in borrowing money from your family and friends to start your business. Even so, no list of business funding for dummies tips would be complete without mentioning that option.
The common mistake people make when getting their friends and family involved in business is treating them differently. They don’t look at their loved ones as business partners and instead consider them only as backers. That fundamental flaw in perception can tank your business and relationships.
Don’t expect your loved ones to fund your business out of the goodness of their heart. Explain your idea to them and offer an opportunity to purchase a stake. Draw up contracts so you and your loved ones are protected no matter how the business evolves. Approach your friends and family that way, and you can secure funding from the best possible business partners.
6. Sell Ownership Stakes to Investors
Not everyone can use personal resources or lean on loved ones to secure financing for their business venture. If that’s your current situation, your best option is to secure funding from external resources. Now is the time to get in touch with investors.
You have two options if you’re willing to sell ownership stakes in your business to outside investors. One option involves speaking to angel investors, and the other has you talking to venture capitalists. Those are different funding sources because angel investors use their money, whereas venture capitalists invest money from a collective fund.
This option is worthy of inclusion in an article detailing business funding for dummies because it decreases your level of financial risk. Remember that you’re not borrowing anything from an angel investor or a venture capitalist. Instead, you’re selling a part of your business to them. You are accepting their money in exchange for giving them ownership rights.
Even if your business ultimately tanks, you won’t owe your investors anything. They invested in your business knowing the risks and are willing to cut their losses if things don’t work out. You can focus on running your business instead of constantly worrying about a loan.
Then again, you must realize that selling ownership stakes means ceding total control of your business. Depending on the size of the ownership stake you sell, you may even lose majority control. Make sure you’re on the same page as your potential investors before you sell ownership stakes to them. Any business without a unified ownership group is doomed to fail.
7. Secure Funding Using a Business Loan
Sharing your company with co-owners can make managing it significantly more complicated. You may want nothing to do with the potential complications that arise from opening up your business that way. That’s perfectly understandable, and it’s also why we wanted to mention loans in this article focusing on business funding for dummies.
Since you’re taking out a loan to help your company, you should specifically apply for a business loan. The beauty of a business loan is how simple it is to work with. You get the money from the loan, use it to cover your expenses, and pay it back gradually.
While the mechanics of a business loan are fairly simple, the application process involved is anything but. You need a good credit score to qualify for this type of loan. According to Forbes, you’ll need a minimum credit score of 680 for a Small Business Administration or a conventional bank loan.
On top of that, you must be able to elaborate on where the money from the loan will go. You must map that out carefully because a lender may opt against offering funding otherwise. They will examine your plans to determine if providing you funding is a good idea.
Also, using a business loan to start your company may not be an option. Many lenders offering this loan entertain applications only from businesses that have been around for a while. This loan may be better suited for funding expenses such as business signage or new equipment instead of serving as a starting fund.
8. Leverage Your Home Equity for Funding
Your home is likely your most valuable possession. After years of diligently paying your mortgage, you’ll soon be able to say that you fully own your home. While having the opportunity to make that proclamation is a great reward for all your hard work, you can use your home equity differently. To be more specific, you can use your home equity to fund your business idea.
Available options if you’re willing to leverage your home equity include cash-out refinancing, applying for a home equity line of credit, or taking out a home equity loan. Talk to your lender and a financial advisor to determine which option makes more sense for your current financial situation. Some options may also not be available to you.
The main drawback to securing funding for your business this way is that it simply takes a long time to build up the necessary equity. Factors such as your down payment and monthly payments will affect how long it will take to build up the home equity required for a substantial loan. If you cannot afford to wait that long, you’ll be better off considering the other business funding for dummies tips included in this article.
9. Apply for a Title Loan
Lastly, this list highlighting business funding for dummies tips must include title loans. Title loans are short-term debts you can take on to fund your business. They are helpful resources if you need a quick infusion of cash. Most of these loans also involve cars.
The mechanics of a title loan are pretty simple. You sign over the title of your car to a lender, and they will offer you a specific amount of cash in return. You’ll have to pay the loan back on time to regain your vehicle’s title.
Applying for a title loan makes a lot of sense if you just need to make ends meet for a month or so. The money from the loan can buy you time until your cash flow returns to normal. Getting a title loan will not suffice if you want to expand your business or pay for similarly large changes. You should look into potential mergers and acquisitions if you’re hoping to grow your business faster.
The hardest part of starting a new business could very well be funding it. Hopefully, the options detailed in this article have helped you come up with ways to solve that problem. Feel free to visit our website as well if you’re seeking more business advice!