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Funding your business

It costs money to start a business. Funding your business is one of the first and most important — financial choices most business owners make. How you choose to fund your business could affect how you structure and run your business.

Determine how much funding you’ll need

Every business has different needs, and no financial solution is one size fits all. Your personal financial situation and vision for your business will shape the financial future of your business. Once you know how much startup funding you’ll need, it’s time to figure out how you’ll get it.

Self-funding

Investors

Loans

Fund your business yourself with self-funding

Self-funding lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends for capital, using your savings accounts, or even tapping into your personal resources. With self-funding, you retain complete control over the business but you also take on all the risk yourself. Be careful not to spend more than you can afford, and be especially careful if you choose to use tap into retirement accounts early. You might face expensive fees or penalties, or damage your ability to retire on time so you should check with your plan’s administrator and a personal financial advisor first.

Get venture capital from investors

Investors can give you funding to start your business in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in the company. Venture capital differs from traditional financing in a number of important ways. Venture capital typically:

  • Focuses high-growth companies
  • Invests capital in return for equity, rather than debt (it’s not a loan)
  • Takes higher risks in exchange for potential higher returns
  • Has a longer investment horizon than traditional financing

Almost all venture capitalists will, at a minimum, want a seat on the board of directors. So be prepared to give up some portion of both control and ownership of your company in exchange for funding.

How to get venture capital funding

There’s no guaranteed way to get venture capital, but the process generally follows a standard order of basic steps.

  1. Find an investor 
  2. Look for individual investors sometimes called “angel investors” or venture capital firms. Be sure to do enough background research to know if the investor is reputable and has experience working with startup companies.
  3. Share your business plan 
  4. The investor will review your business plan to make sure it meets their investing criteria. Most investment funds concentrate on an industry, geographic area, or stage of business development.
  5. Go through due diligence review 
  6. The investors will look at your company’s management team, market, products and services, corporate governance documents, and financial statements.
  7. Work out the terms 
  8. If they want to invest, the next step is to agree on a term sheet that describes the terms and conditions for the fund to make an investment.
  9. Investment
  10. Once you agree on a term sheet, you can get the investment! Once a venture fund has invested, it becomes actively involved in the company. Venture funds normally come in “rounds.” As the company meets milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan.

Use crowdfunding to fund your business

Crowdfunding raises funds for a business from a large number of people, called crowdfunders. Crowdfunders aren’t’t technically investors, because they don’t receive a share of ownership in the business and don’t expect a financial return on their money.

Instead, crowdfunders expect to get a “gift” from your company as thanks for their contribution. Often, that gift is the product you plan to sell or other special perks, like meeting the business owner or getting their name in the credits. This makes crowdfunding a popular option for people who want to produce creative works (like a documentary), or a physical product (like a high-tech cooler).

Crowdfunding is also popular because it’s very low risk for business owners. Not only do you get to retain full control of your company, but if your plan fails, you’re typically under no obligation to repay your crowdfunders. Every crowdfunding platform is different, so make sure to read the fine print and understand your full financial and legal obligations.

Get a small business loan

If you want to retain complete control of your business, but don’t have enough funds to start, consider a small business loan. To increase your chances of securing a loan, you should have a business planexpense sheet, and financial projections for the next five years. These tools will give you an idea of how much you’ll need to ask for, and will help the bank know they’re making a smart choice by giving you a loan. Once you have your materials ready, contact commercial banks, co-operative socities, Micro Finance Banks, Bank Of Agriculture, Central Bank of Nigeria, NIRSAL Microfinance banks, Commercial Banks, Nexim Bank, Developments Bank of Nigeria, Bank of Agriculture, African Development Bank etc to request a loan. You’ll want to compare offers to get the best possible terms for your loan.

Buy an existing business or franchise

Starting a business from scratch can be challenging. Franchising or buying an existing business can simplify the initial planning process.

Know the difference between franchising and buying a business

Before you decide if one of these options is right for you, make sure you know the basics of franchising and buying an existing business. The main difference between franchising and buying an existing business is the level of control you’ll have over your business.

Franchising gives you more guidance but less control

A franchise is a business model where one business owner (the “franchisor”) sells the rights to their business logo, name, and model to an independent entrepreneur (the “franchisee”). Restaurants, hotels, and service-oriented businesses are commonly franchised.

Two common forms of franchising are:

  • Product/trade name franchising: The franchisor owns the right to the name or trademark of a business, and sells the right to use that name and trademark to a franchisee. This style of franchising normally focuses on supply chain management. Typically, products are manufactured or supplied by the franchisor and delivered to the franchisee to sell.
  • Business format franchising: The franchisor and franchisee have an ongoing relationship. This style of franchising normally focuses on full-spectrum business management. Typically, the franchisor offers services like site selection, training, product supply, marketing plans, and even help getting funding

When you buy a franchise, you get the right to use the name, logo, and products of a larger brand. You’ll also get to benefit from brand recognition, promotions, and marketing. But, it also means you have to follow rules from the larger brand about how you run your business.