This is part of the #StartupMentor series - featuring founders who share their advice in building successful businesses.
One of the biggest stumbling blocks preventing thousands of smart business ideas from coming to life is the question of funding. Would-be entrepreneurs quake in their boots at the thought of how they'll produce the finances required to get their idea off the ground.
Thankfully, this fear is often an excuse and not based on real facts. Because the reality is, it's never been easier for potential entrepreneurs to get their business funded.
Let me take you through 4 completely straightforward and absolutely legitimate ways of acquiring seed capital for your dream business.
- Loans from Friends and Family
- Pre-Sales or Customer Financing
- Purchase Order Financing
The prospect of borrowing from near and dear ones is perhaps the option that entrepreneurs most dread. Your self-respect is at stake here; so you'd better come up with a creative, convincing and sincere pitch.
It's a different story that often you might draw a total blank and might have to still consider other avenues, but this is an alternative that is definitely worth a shot. Before you approach any family member for a loan, make sure that you really need it and try to keep your dealings as transparent - I'd go as far as to say business-like - as possible.
Use a loan calculator like this one to figure out exactly how much cash you'll need and then approach your family.
When taking loans from friends and family you must, at all costs; have a written agreement covering every last detail regarding the loan. This includes the loan amount, the repayment period, the amount of each repayment installment, the interest rate if any, consequences of non-repayment etc.
The last thing you want is a family feud thanks to the loan threatening the future of your fledgling business.
In the regular course of business, a company produces goods or services and then finds buyers they can sell them to. Trouble is, producing goods and services requires funds - funds that are usually pretty hard to come by.
So what if there was a way to get the money first, and then produce the goods and services? Better yet, what if you get future customers to lend you the money? Well, this smart idea is what pre-sales funding or customer financing is all about.
Entrepreneurs who have a concept for a product or service approach their potential customers and ask them if they would buy such a product or service. If they respond positively, the customers are asked to put down a payment in part or full towards the product and the entrepreneur delivers the item / service to them within a stipulated period of time.
Customer financing is a hot commodity in the present market. Brian Zeng, the CMO of Ownonly, a men's fashion retailer on the "online high street" as he calls it, explains;
"Customer financing is a lot like the way our business works. We have a high-quality product that the customer wants. We have the ability to customize it exactly according to their needs. They in turn are saved the trouble of going hunting for a supplier and get a fully personalized product."
Win, win in the true sense!
In another example, Stephen Ou explains step by step how he went about raising funds from his potential users for a proposed WordPress Editor before he even wrote a single line of code.
This is a logical follow-through for a second round after customer financing. No business is immune to the problem of a tricky cash flow situation. Very often, new startups and fledgling businesses run out of funds to fulfill a particular customer's order.
What happens next?
Well, the business owner walks up to a Purchase Order Financing company and 'sells' his current purchase orders to them in return for immediate cash up to a maximum of 100% of the value of the purchase order.
Often, the cash offered by the financing company is only 90% or lower. Additionally, the company will charge the business owner a fee for offering cash up front. This could range anywhere from 2 to 5%.
The financing company then collects the actual payment from the real customer once the product is delivered / service is rendered by the startup.
The upside to P.O. financing is that it offers immediate cash for the startup to survive and grow. You also don't lose any equity in your startup in exchange for funding. It's also easier to qualify for a P.O financing operation as compared to a bank loan.
You don't need me to tell you about crowdfunding. What started as a way to support entrepreneurial dreams has now turned into a way to fund just about anything - from Hollywood movies to technological innovations to art projects, the list is endless.
The best part?
Often crowd-funded startups like the Oculus Rift eventually get bought over by larger companies - Facebook bought it for 2 billion.
These larger companies pump in the millions needed to take the business startup idea or an existing small business to the next level.
The basic concept of crowdfunding is simple. Potential entrepreneurs with a clear business idea solicit funding from individual investors through a crowdfunding platform like Kickstarter or Indiegogo.
Typically, there's a fee that the platform charges businesses for listing their crowdfunding requirement. The return that investors can expect are varied in size and form.
From getting a stake in the business, to getting a pre-order of the product that the business will build to even goodies like free t-shirts or watches, the rewards span the entire gamut. The good news? It's a great new way to reach out to investors that never existed before.
The bad news however, is that so many people have jumped onto the crowdfunding bandwagon, your idea and business case need to be really strong for you to generate any level of interest at all.
Besides these options listed above, there are always traditional bank loans, government aid schemes, and many more ways you can accumulate funds for your business. Is there any particular funding source that you prefer over others?
Tell us which one it is and your reasons for preferring it in the comments below!