Opening a business requires start-up capital. You need to register a legal entity, purchase materials and equipment, pay rent and cover marketing costs. The money should be enough until you reach the break-even point. Where do you get funds if your own savings are not enough?
Option 1: Find partners or co-founders
If there is someone you know who believes in your project and is willing to share not only the profit but also the responsibility, you can invite this person to become a co-founder.
Partners share the costs of launching and developing the project. The company’s profits are then distributed proportional to each person’s contribution.
Partners can also reduce the burden on you if they have some of the right skills. In this case, you can divide the areas of responsibility in the project.
Your partners may also have very useful connections for the development of the project.
Fix all agreements with co-founders legally, even if they are close friends.
The minimum terms to consider include:
- the amount invested in the launch;
- each partner’s area of responsibility;
- how profits will be distributed;
- how the partner’s exit from the business will be carried out.
Option 2: Clients’ money
There is a risky method of attracting funds that will suit some niches. You can sell services or goods for prepayment and spend the money on organizing production.
The risk is that the client may change their mind and ask for the prepayment to be returned. It is also possible that you will miscalculate and not attract enough money to fulfil your obligations.
To avoid damaging your reputation, we advise you to be honest with the buyer and tell them about your financial model. Prove the buyer that you have taken all the risks into account.
Option 3: Borrowing
Borrowed funds come in loans from banks or individuals with an interest rate. Those who do not have enough personal funds to launch a project and do not wish to attract partners or investors in their business, turn to loans.
Before taking out a loan, look through your contact list. More often than not, it will include a few people who may have spare funds. It will be easier to negotiate favorable terms with them. You may even be able to borrow interest-free. Also, you will not have to buy insurance. However, at least put the deal on paper.
It may be challenging for a startup to be approved for a business loan. You might not qualify for a preferential lending program until your project is past the startup phase and has proven profitability.
Therefore, many entrepreneurs begin with getting a personal loan. However, you will need a good credit history to be approved for one.
An important notice: do not use loan aggregator websites. What they do is send out tens of requests on your behalf every day for six months. If you have applied for loans from several large banks, small ones will immediately turn you down. Multiple rejections can cause your credit score to drop, making it less likely that you’ll be approved for borrowing.
Instead of buying expensive equipment, consider leasing it. A lease is a type of arrangement where the bank effectively buys the equipment, and leases it to you in exchange for regular payments. Essentially, you are acquiring the use of the asset over an extended period.
Option 4: Investment
Attracting an investor is the safest option for a startup. The investor will be interested in your project making a profit, as they invest their money in exchange for a stake in the company or other forms of remuneration. This means they are likely to continue to help the company grow.
In case of failure, you will not have to return the money invested in your project.
Who can be an investor?
- Your friend, acquaintance or relative.
- Any individual interested in your project. You can find an investor by placing an ad on the Avito classified ads platform or in a franchise catalog. Attending business breakfasts and other local business events and talking about your project is also a good way to look for investors.
- Professional investors such as private investors, venture capital funds, wealthy families, groups of entrepreneurs, investment funds, accelerators, corporate investors, etc.
Option 5: Gratuitous support
Each region offers non-refundable support measures designed to support certain industries.
These may include grants – private funds or public money awarded on a competitive basis as part of certain support programs.
You may also be eligible for a subsidy, which will compensate for at least part of the expenses of starting a business.
If you are registered as a low-income or unemployed citizen, you can apply for a lump payment of up to RUR 350,000 ($3,650) to start a business. You will sign an agreement with the government known as a social contract. You will need to provide a business plan to apply.
If you are planning to develop an art project, you can present it on a dedicated online platform where you can find potential sponsors. This method is called crowdfunding. People can provide funds in exchange for future benefits or make donations.
Whichever fundraising method you choose, it is of the essence to have a financial model in place that will lead your business to steady growth. The easiest way is to pick a promising franchise and start your business using a tested business model.
By Dmitry Morgunov, entrepreneur, co-founder of the SneakNFresh shoe cleaning and repair chain