Business Start-up Funding - Internal Options

When it comes to business start-up funding, everyone has to do a little heart-searching. There are never any easy options. After all, every funding decision you make, will create more decision points down the line and some of them will not be easy. Knowing that, businesses have to take the plunge and ensure there is funding for growth, and sufficient resources to maintain an improving business foundation. So, how do you step into the arena and what are the themes that you should look out for along the way?

Business Start-Up Funding, Beyond Personal Means

Nearly every business owner has at some time used personal funds to forward their business. In fact, starting from scratch is a pretty tough path. To use your own money, mortgage or another form of funding injection is going to put the pressure on you to perform. Not only that, but often you have to find people to believe in you who have the resources to help. That too puts the pressure on you. So, what route do you go?

Initially, your business start-up funding is going to take you down one of two routes. The first is the ‘internal’ funding route. This route is probably going to involve smaller amounts of money. The second is the more formal approach, where your funding comes from ‘external’ sources. Normally, the latter is more applicable to businesses raising larger amounts of cash. Let’s explore the internal option.

An investment in knowledge pays the best interest.

~ Benjamin Franklin

Internal Funding Sources

From the outset, internal funding means you need to raise money without going to banks or big investors. Your options are to rely on family, friends, or ‘someone’ you know, as well as your own resources. With this type of funding your initial approach is relatively easy. You will probably feel your approach to friends and family is not as difficult as finding big investors or approaching financial institutions. After all, your approach is easier because you know the people you might ask. Or, at least that is what you think. In fact, sometimes it is quite difficult to ask your friends or family to give you sufficient money. If your enterprise fails, you might be ruining relationships that are close to home. So, you need to think about this carefully before you get started.

Less Pressure? Not Necessarily

Ideally, there is little pressure to achieve aggressive financial targets and performance goals with the internal funding route. So, there is the opportunity of growing the company using existing resources and at a pace that allows you to get things working properly.

On the other hand, the lack of pressures forcing performance can lead to a degree of complacency. This is deadly to a business. The time, and the opportunities can slip away and you can miss the one chance you have to getting off the starting line. Worse still, if you are not a ‘self-starter’, you risk the initial investment slipping away, before you make a profit. You must generate income, so you need to retain a strong business focus to generate sufficient cash.

When business start-up funding comes from your own ‘internal’ resources, you often need to impress a wider range of people. Friends or family can be persuaded to contribute on an individual basis. Although, you may have to approach a number of people. Clearly, because of your responsibilities with people you know, you will have to plan carefully. Dealing with a group of low-level funders carries its own challenges. Be aware that you may have to spend more time keeping them informed than you would with, say, a bank.. However, if you are lucky enough to get one funder, your personal responsibility to them can be a burden too. Make sure your relationship can stand it.

What Planning Do You Need to Do?

If funding is from family or friends, or ‘someone’, you know ensure you think over these points…

The agreement should be in writing. You need to think about things like…

• Protect others against losses: The money invested in your business can be lost. Ensure that the loss of the money would not affect their home or standard of living.
• It should specify the amount involved, any conditions and whether it is for an equity stake in the company or as a loan.
• When and how can money be removed / repaid.
• What returns on the investment can be expected (e.g. the valuation of loan or shares).
• Get professional advice for both parties. Remember, personal & business circumstances will change, so keep the arrangements flexible and fully documented.

You should consider aspects of your relationship with the people who you approach to invest. For example, divorce, when assets need to be divided, you may find your own resources diminished suddenly.

What would happen if you approach an older person? Have they got sufficient resources to cover themselves if the business fails and you cannot pay them back? They need to be aware of, and in control of their personal finances. Lending money can have serious consequences, if they are suddenly left, without enough to survive.

Think about health too. If your friend or family member lends you money, what if they die suddenly, are you involved with a will? Is there sufficient money to pay your loan back, if the will demands particular amounts to go to benefactors. Are you even in the will?

Life often throws curve balls. Your lender may be a family member or a friend, but what happens if they lose confidence in you or suddenly need the money themselves, how is that going to affect you, them, your relationship and the business?

Keep friends and family involved, both in the good and the difficult times. No-one likes surprises, because too often the surprise is bad news. This is especially the case where health and continuity of the business depends on good will of your friends and family.

Exit arrangements – ensure you documents the exit route. This applies to you and to your lender. This readiness sets the level of expectations in your new relationship. It also helps you reassure your lender. After all, they need plus points in this arrangement too.

Complexities

The complexities of setting up the sort of arrangements needed to fund your business may make the ‘internal’ route too risky for you or your family and friends. So, you need to look at the balance of business risk that may affect your business commitment. You cannot just walk away from it, if you have close friends/family who rely on your business judgement and some sort of pay-back. So, there is quite a difficult range of considerations you need to be aware of and to prepare contingencies against. Not only that, but these considerations are outside of any business decisions you should consider.

It is not the ‘Easy’ Route

If you are going to take the ‘internal’ route, get advice. Develop a support plan for yourself. Then you will have contingency cover, alternative funding, flexibility and other people who can help you.

Never borrow too much from people close to you. Consider the feelings of those, who lend you money too. Then, on top of that, think about how to grow your business as well.

In the end, going the internal route is not the easy route. Both internal and external business start-up funding have benefits and difficulties. Consequently, you need to ensure you are aware of everything that is in the balance.

Finally, to be successful in your new enterprise you need have plans to ensure you can maintain that balance. After all, your future depends on it

Charter 4 does not provide funding nor financial advice.

However, many of the ideas in this article are based on sound business principles and business improvement.

If you are reading articles like this one, then we are sure that one day your business will want to raise its standards. CHARTER4 is a business based on standards. We focus on helping our clients to improve their business through meeting the international standards that are becoming increasingly important in the global business village. If you think your business is ready for the challenge and rewards of the established, quality management standards. then we can help.

We are specialists in ISO 9001 – the quality management standard. But we are also able to deliver skilled consultancy and support in a whole range of ISO Standards that will increase the potential of your business, please your customers and make your business a better prospect for investment. However, best of all, we don’t just help you tick the boxes. At CHARTER4 we ensure that certification to ISO Standards is integrated into your business. We aim to improve your business, rather than just comply.

We can help your business become a better prospect for investment. If you would like to know more, please contact us. We look forward to supporting your success.