This post is part of a series on ten foundational principles of being an entrepreneur.
Finding the funds to start or grow your business can be a challenge. While some businesses can naturally grow slowly through sales, others need significant cash up front before they can open their doors. Most fall somewhere in between. When you need cash, it can be tempting to give up on your business altogether.
The good news is that there are many sources of funding (also known as capital) available for small businesses. The trick is to figure out which will work best for your personal situation.
Start by considering the following questions.
How’s your credit score?
One of the most common sources of funding for businesses is bank loans or lines of credit. A bank determines how much money a business can borrow and gets paid back over time with interest. But many entrepreneurs don’t realize that banks won’t lend to businesses that lack a financial track record. If you’re just getting started, this means your business itself can’t borrow money.
But you, the entrepreneur, can.
This is where your credit score becomes important. Based on your past history of borrowing money, a credit score lets a financial institution know whether or not you’re safe to lend to. The higher your score, the better.
If your credit score is too low (or nonexistent), getting a bank loan may not be an option for your business—at least until the business has a long enough track record to vouch for itself.
Are you willing to give up ownership?
If you’ve ever watched Shark Tank, you may be familiar with the entrepreneur’s dilemma: how much ownership to give up in exchange for an investment in the business. An equity investment can provide a big injection of cash, but it comes at a price. You have to give away part of what you’re building and entrust it to someone else.
A good investor typically brings more than money—experience, industry knowledge, and connections. These assets might be worth exchanging some ownership for; with an investor’s help, you may achieve greater growth than if you were to do it alone.
However, when you bring on an investor, you will likely give up some flexibility, as well as control. You’ll need to justify your actions and negotiate with your investors on all major decisions. Depending on how much ownership you give away, you could even be outnumbered and overruled.
Do you have something that you can presell?
If you have something you can presell (sell before you make it), crowdfunding might be an option for you. Crowdfunding provides a way for people to pre-purchase your product through pledges, giving you the funds needed to make it. Because crowdfunding relies on people paying up front, it can also help you quickly determine the level of actual interest in your product. The added bonus is that it provides great marketing opportunities while allowing you to maintain complete ownership and control of your business.
However, crowdfunding requires a significant initial investment of time and money to launch. Poor campaigns can even hurt a business, alienating potential customers. Also, if you fall short of your goal, you may get nothing. Even if you meet your goal, delivering your rewards and paying for your campaign may use most of the raised funds. If anything goes wrong in production, you might have some angry customers on your hands.
How will you use the funds?
Be clear on how the money you’re getting will help your business make enough money to pay it back—especially if you are seeking a loan or investors.
When running the numbers for the business, one of the primary gaps most entrepreneurs see at the start is the money needed to pay themselves a salary. But using borrowed or invested money for payroll is risky. When the money’s gone, it’s gone.
On the other hand, using the money to purchase the equipment needed to make your product not only helps build your business, but it also has resale value. If something goes wrong, the equipment could be sold to help repay lenders.
Be strategic about where you invest borrowed dollars.
When you arrive at answers to these questions, you’ll be well on your way to the right funding solutions for your venture. If none of these seem to work for your situation, don’t despair! You can always start small and grow smartly, one sale at a time. There’s always a way forward.