Starting a small business is an exciting adventure that can result in a level of freedom and wealth that few people ever get to experience. But while having a great business idea and the skills to execute it are necessary for business success, they are not all that is required. The saying that you have to “spend money to make money” is almost always true, and starting even a small business often costs more than most Australians have in their savings account.
Even if business owners manage to keep expenses to a minimum, they usually need to find additional funds to help launch their business. There are several ways to do this, each with their own advantages and disadvantages. Most fall into the four main categories which are discussed below.
Crowdfunding
This method of funding only appeared in the last couple of decades. It leverages the power of the internet to encourage lots of people to donate small amounts of money towards the launch of a company. The donors are usually promised something like a free product or a discount once the company gets going. They are not buying a stake in the company’s ownership, so your share will not be diluted.
Crowdfunding is challenging, though. You need to be very good at marketing to get enough people to donate. It also works best for companies with a big vision. It is not often used for independent shops and cafes, for example.
Business loans
When you apply for business loans at Pronto Funds or other lenders, you also get to keep all of your share of the business. However, loans are not donations and you will have to pay them back with interest. You might also need to pledge business or personal assets as collateral, meaning the bank will take possession of them if you cannot pay them back.
Loans tend to work best for businesses with predictable, steady cash flows. However, there are options such as venture debt for very new startups that have high growth potential but are yet to make any sales.
Equity investors
Investors give you money in exchange for an ownership stake in your company. They could be your friends and family, private backers such as angel investors, or other businesses like venture capital firms. You do not directly pay them back like you would with a loan, but they will take some of your profits if your company is successful.
Besides giving up some of your profits, you might also lose some of your control over business decisions.
Grants
Government agencies and other non-profit organisations sometimes fund businesses through grants and programs. In most cases, this is essentially free money. The only requirement is that you must use it to fund a specific type of business, such as developing a new medical or eco-friendly technology.
Conclusion
No business is ever identical to another, so there is no single best way of funding one. Grants are great if you can get them, but they are rare, industry-specific, and highly competitive. If you are choosing from the other three options, you will have to decide which best fits your business.