Your LivePlan Small Business Plan – Funding Your Business

PART OF PROPOSITION 2: DEVELOP A PLAN

You have a killer idea for a small business. Maybe you’ve even gone through the entire Complete Guide to Creating a LivePlan and have written a comprehensive LivePlan business plan of your own. Now you need to fund your plan.

Your LivePlan Small Business Plan – Funding Your Business

Today, there are lots of options available for raising outside funds.

In this post, I explore some of the various sources available and address documenting the use of funds in your LivePlan.

Richard Branson started his first legitimate business at sixteen. He went on to found Virgin Group, which currently employees over 70,000 people.

Source of Funds

Overview

Ideally, you’ve worked long and hard enough at a job to gain some experience and put away some savings to fund your venture and to give you a runway as you are starting out, especially if you don’t have another source of income.

Or maybe you have a rich uncle who is willing to fund your new business.  

But, if you’re like most people, you are not sitting on a pot of gold and have to consider the multiple options available for funding your business.

Self-Fund

I’ll start with the most obvious source of funding your business; you.

If you are starting a service-based business by yourself in the beginning, have a little bit of savings, and already have some clients, getting started may only require some serious hustle.

Maybe you have a working spouse or some other source of support to help pay your living expenses while starting.

If neither of these scenarios describe you, you may need to start and build your business more slowly, continuing to work full-time while it gains some traction.

This will allow you to continue paying your bills and can help gauge how bad you want to succeed.

Starting a successful business is hard work, so if you can gain some traction while working full-time, you are more likely to continue when you decide to leave the security of full-time work.

Finally, you may need to devote more time to your business, and holding a traditional, full-time job while trying to get started may not be practical.

If you still need a source of income, get a part-time job.

Don’t be too proud to get a job bartending or waiting tables.

There is a reason that restaurant work is the most popular job for people trying to make a name for themselves in Hollywood.

It offers flexibility and better pay than most other part-time, hourly jobs.

You can work on your business during the day and make money in the evening until the business is generating enough income.

You could also look for part-time freelance work in your industry to help gain additional experience and form new relationships.

All of this advice is common sense and, if you are self-funding your business, completing this section of your LivePlan should be relatively simple.

However, if you need to purchase equipment or inventory or have other needs for startup capital, you may need to raise outside funding.

For most small businesses, this usually starts with turning to the 3 Fs: family, friends, and fools.

Family, Friends, and Fools

If you need a little bit of financial help, or maybe even a lot, the 3 Fs is what the first group of people you may turn to for funding is typically referred to as.

People from this group will usually make smaller investments, so if you are going to ask friends and family for money, you’ll likely need to ask more than one.

Once you turn to outside funding, even it is from this group, having a solid business plan that is written for a specific purpose becomes important.

You may even end up with multiple versions of your plan, each written with a specific audience in mind.

Investors and lenders will want to see that you have thought through everything that goes into starting and running a business before they hand over their hard earned money.

Lender or Investor?

A lender loans you funds to start your business.  The loan should come with repayment terms indicating how soon the money will be paid back and at what rate of interest.

An investor typically becomes a partner or shareholder in your business in exchange for the funds they invest. They may be passive in the business and leave the management decisions to you or may be active and help manage the business.  

Taking on an investment partner or partners is usually more expensive for a successful business, as investors typically expect better returns than a bank. However, investors understand that it may take a while before they see a return on their investment, if they see any return at all.  

Lenders usually require that you start repaying a loan immediately, so cash flow is one reason people may choose an investor over a lender.

Another reason is that, if the business doesn’t pan out or takes longer than expected to get results, a lender will often require personal collateral or guarantees and can demand repayment.

An investor is more likely to lose their investment.

Will your 3 Fs be investors or lenders?

They could be either.

This is one of the details you need to work out.

In either case, you should get something in writing.

A loan agreement should spell out the amount of the loan, when it is expected to be paid back, and at what rate of interest.

You may choose to draw up something yourself but, if you would like to be taken more seriously and want to make sure you cover all of your bases, you should consult an attorney or use a service like Legal Zoom to create a formal, customized loan agreement.

I suggest that seeking legal help is even more crucial if you take on equity investors.

You should have a partnership or operating agreement drawn up, which will spell out how much each partner or shareholder will invest, how profits will be divided, and many other terms.

Promissory Note

Courtesy of gaylevenleer.com

Partnership Agreement

Courtesy of creditcards.com

Turning to family, friends, and other people you have relationships with may get you all of the outside funding you need.

If it doesn’t, and you are starting a growth-oriented small business, an angel investor or venture capital firm may be the answer for you.

Angel Investors and Venture Capitalists

If you are starting or running a business that has grand aspirations and you want to grow into a large business quickly, angel investors and venture capitalists are viable options for you.

Angel investors typically invest relatively modest amounts into early stage, growth-oriented businesses.

Their investments can range anywhere from a few thousand dollars to several hundred thousand, or sometimes even millions of dollars.

Venture funding usually comes in later stages and for larger amounts of money, typically into the millions of dollars.

If you’ve ever seen the show Shark Tank, the “Sharks” are examples of angel investors.

Two examples of Shark Tank pitches. One for fun and one for inspiration (an entrepreneur who Starts With Why).

An angel investor is an affluent individual who is looking to diversify their portfolio by investing in early stage, high-growth startup companies.

The risk in investing in these types of companies is extremely high, as most of the businesses in this category completely fail and return nothing to their investors.

Therefore, when an angel invests in a company, they are looking for extremely high returns on their investment.

If an angel invests $100,000 in a business, they typically hope to see a return of at least $1,000,000, or 10x, within a few years.

As this only happens with a small percentage of an angel’s investments, the winners need to win big to offset the losers and make this form of investing worth the risk.

Angel investments typically come in the form of equity investments or convertible debt.

Traditionally, the best way to seek out an angel investor was to talk to people in your professional network (think doctors, lawyers, cpas) and ask for referrals.

Today, seeking warm introductions shouldn’t be ignored, but there are also angel investor groups and technology platforms like Gust that make the process of connecting with interested angel investors easier.

Angels typically bridge the gap between a growth-oriented entrepreneur’s initial funding from savings, family, and friends and venture funding.

Venture capital comes from professional investing firms who raise money from affluent individuals and institutions.

The reality is, I didn’t create TheEmbarkment.com for business owners on the venture funding track, so I’m not going to elaborate on venture funding.

I commend you if you are on that track and am confident you can gain some valuable insight from my content, but the people I created this website and the Create a LivePlan blog series for are not seeking, and don’t plan to seek venture funding.

Most people viewing this content probably won’t even seek out an angel for investment.

The reality is, there are plenty of other resources out there for businesses looking for angel and venture funding.

Most small businesses, as I define them, will get an investment from someone in the friends, family, and fools group or, even more likely, will borrow money from other sources if they require outside startup funding.

Other sources like credit cards.

Credit Cards

Today there are more options than ever before for borrowing money, which is great news for small business owners like you.

If you are just starting out, it is hard to get a traditional small business loan from a bank without a track record of at least a few years.

There are always exceptions, especially if you have collateral you can put up, but this is a reasonable generalization.

However, there are still traditional options for borrowing smaller amounts of money.

If you need less than $50,000, have a solid plan, believe in yourself, and are willing to take the risk, I advise that you consider using credit cards if you do it responsibly and don’t let it get out of control.  

I think it may be the best option in many cases if you qualify for moderate credit limits.  

You can often access credit card advances or obtain new credit cards with small upfront fees with little or no interest for a year or more.  

Again, I don’t recommend getting carried away with this.

Only use credit cards that you know you can manage payments on, and if you take advantage of special offers, be sure you have a plan to pay off the balance before the promotion ends.

Websites like CreditCards.com offer a variety of options so that you can choose a credit card or two that fits you and your business needs best.

There are also more progressive options available today if you need a small to moderate amount of money and would prefer a fixed term loan.

Peer to Peer Lending

Peer to peer lending is a relatively new option for small business owners looking for startup capital.

Services like Lending Club bring together and provide an alternative for borrowers and investors.

The overhead of this type of service is lower than that of traditional banks, so it can often provide better rates for borrowers and better returns for investors than comparable offerings from other lenders.

While individual investors are welcome to invest in platforms like Lending Club, a majority of the funds being lent come from larger institutions looking to diversify their investments.

The one hurdle that exists with a service like Lending Club is that, in order to qualify for a small business loan you need to be in business for at least two years.

This leaves the personal loan option, but to qualify for this you need to show proof of steady income to support your ability to pay the loan back.

Therefore, peer to peer lending is best if you, or possibly your spouse, are currently employed and can support your ability to pay back the loan from nonbusiness income.

Once the loan is secured, you can use the funds to get your business started.

Getting a loan is not the only progressive option you have.

Crowdfunding is another relatively new, viable option.

Crowdfunding

Another newer, progressive option if you are selling a product is crowdfunding, where you pitch your product idea and get customers to fund it.  

It’s not a lending option, but is an option for raising funds.  

This is a great way to validate and fund your idea all at once.

Kickstarter is the most popular place online for crowdfunding, but several similar and niche competing sites have popped up in recent years as well.

This video is an excellent, in-depth resource for advice if you are curious (or serious) about crowdfunding.

Check out this comprehensive guide put together by Shopify for more information on the ins and outs of crowdfunding.

Finally, if you’ve been in business for a few years or think you could otherwise qualify, consider talking to a bank.

Traditional Banks

The previous several options discussed are less conventional sources for funds.

If you need more money or are more comfortable going the more conventional route to borrow funds, you can try talking to some banks.  

Assuming you are a smaller business, I would recommend talking to some local, community banks to find out what they offer to small businesses and if they may be able to help.  

I have mentioned that it is difficult to obtain traditional financing until you have at least two years of history, but if you have a solid plan you may be able to find a small local community bank willing to take a chance on you.

Just keep in mind, borrowing from friends or family, credit cards, or peer to peer lending networks are unsecured options, meaning if your business is unsuccessful they can’t do much to you personally.  

Your personal credit score will be damaged, but you typically don’t stand to lose any of your personal assets, etc.  

If you go to a bank and ask for money, you almost always have to personally guarantee a small business loan.

If you can’t pay it back, the bank will likely be able to come after your personal assets.

In this sense, if you need substantial capital, you may also consider using equity in your home.  

A lot of people are not comfortable with this, but you typically have to put up personal assets as collateral to get a business loan anyways, so taking out a mortgage is also an option.

Once you’ve nailed down the sources of the funds you will need to start and run your business and have documented them in your LivePlan, you will need to address the use of those funds.

Use of Funds

An investor or lender is going to want to know what you will do with their money, and the plan for those funds should be sound.

If your plan for the money is to pay your personal bills and living expenses until your business generates positive cash flow, you are unlikely to secure the needed funding from and investor or lender.

This is what personal savings are for or why you may need another source of income when you are starting out.

The money you raise should be used for purchasing equipment, hiring employees, marketing the business, or serve some other business purpose.

Document your plan for your funds in this section of your LivePlan, even if you are funding the business yourself.

Be as specific as possible if you are writing this plan to raise funding.

If the lender or investor believes you have a well thought out plan for where the money will go, you are much more likely to raise the desired funds.

Next Steps

Coming up with the funding needed to start a business is often what holds people back.

However, there have never been more options than there are today for raising funds, so it shouldn’t be an excuse.

If you have a good business idea, develop a solid plan, and want it bad enough, obtaining the necessary financing is within your reach.

In wrapping up this post, one thing I encourage you to seriously consider is who you get your outside funding from.

If you do need to raise money, always be cognizant of the fact that if you are asking for money from friends or family, other investors, or a bank, they are likely to remain friendly and leave you alone as long as things are going according to plan.  

However, if things start going south, personal relationships could be damaged and other lenders and investors could become much more inquisitive, to the point of being a nuisance.  

These are serious variables you must consider when it comes to seeking outside funding, so I think it is reasonable to recommend that you only seek outside funding if you need to or are comfortable with these potential consequences.

Document your source and use of funds in your LivePlan and then move on to the final major section; creating your financial forecast.

And remember, if you need more guidance on creating your LivePlan, new groups are forming now for the next LivePlan Online Workshop. Get more information on this here.

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