Strategies: The absolute best way to raise money
You’re excited about starting your small business. You’ve got a can’t-miss idea, developed a business plan, created a prototype. You’ve even found a group of talented people to work with. There’s only one problem — you need money to make it all a reality.
Money. You can’t start or run a business without it. Sure, it takes a lot less money to launch many types of small businesses today — especially one-person service businesses — but even then, you’ll need funds, if only to meet your personal bills so you can devote the time necessary to find and serve customers.
So what’s the best source of financing for a business?
When I ask that question to entrepreneurs, I get all kinds of answers: other people’s money, angel investors, low-interest loans, friends and family, personal savings, even refinancing your house.
But the absolute best way to raise money for your business is to get out there and make sales. Income from sales is the single best option for financing any business. In other words, bootstrapping.
Think of the benefits: You neither have to give up a piece of your company (as with angel investors or venture capitalists) nor do you take on debt (as with a loan, credit card debt, refinancing your house) nor do you give up your personal sense of security (as by depleting your savings).
So, in planning for how you’ll get your business off the ground, look seriously, and creatively, to find ways to get the money you need by making sales to customers.
Now, of course, not all businesses can bootstrap their way to success, growing only after sales have starting to come in. Many types of companies need upfront capital just to open their doors or ship their first product. For instance, you can’t open a boutique, launch that Tex-Mex restaurant you’ve dreamed about, or build your new bicycle manufacturing facility without significant upfront financing.
But you can start small and less expensively. Think “MVP” — or minimum viable product — especially if you’re a novice entrepreneur. Instead of opening a restaurant, how about starting as a personal chef or by catering parties? Before you launch a boutique, try home trunk shows or selling online. Developing a new product? Try selling pre-orders from your prototype.
And there’s a great new method of making pre-sales: crowdfunding. As the name implies, it’s the ability to raise money from a “crowd” — strangers who believe in your idea and are willing to put some of their money into your new business or buy your product before it’s even made.
With most crowdfunding campaigns, rather than giving away ownership in your company, your funders receive a benefit in exchange for their money — usually your product when it finally ships. (Equity crowdfunding is starting in some states.) In other words, you are making pre-sales, the very best way to fund your new product’s development.
Sure, even these activities require some funding. But the risk is much smaller. You’re more likely to be able to self-fund these low-cost “starter” businesses or “minimal viable products.”
Why are sales the surefire best way to raise money?
1. You don’t give up a piece of your business to investors. Investors receive “equity” or a share of ownership of your company. They get to participate in decision-making and take a percent of future profits or proceeds if you sell the company.
2. No debt. Most business loans require personal guarantees, which means you are taking on more personal debt. And you have to make loan payments, increasing your overhead.
3. Fewer distractions. Raising money takes up a lot of time that isn’t directly aimed at building your business. Concentrating on making sales helps you build a more sustainable company.
4. You learn a lot. When you’re out there making sales, you get real-life market info. It helps you improve every aspect of your product, service, pricing, customer service.
And there’s another benefit too. If you eventually need to raise money from investors or lenders, you’ll find they’re a lot more eager to open their wallets when you’ve proven you can land real, paying customers. So get out there and start selling.
Among Rhonda Abrams' recent books is the 6th edition of Successful Business Plan: Secrets & Strategies. Register for her free newsletter at PlanningShop.com. Twitter: @RhondaAbrams.
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