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Choosing the right types of funding
Whether you borrow, find backers or dip into your own savings, there are pros and cons to each source of funding. Here are tips on deciding which will work for you and your business.
There are three main ways to fund your business:
- Use your own money, also known as bootstrapping.
- Borrow, eg loans from a bank.
- Seek investment in return for a stake in the business, also known as equity capital. This includes crowdfunding and investors.
Different sources might be more appropriate in certain industries or at certain stages of business.
Business planning and estimating start-up costs will give you an idea of which options are best for you. It can also be a good idea to talk to a financial advisor or accountant.
Impact on your personal finances
Whichever funding type you choose, it’s likely you will bear at least some of the costs of starting up. Common examples include:
- personal savings
- personal loan
- using your home, car or another personal asset to guarantee a loan.
Using personal finances for your business has its upsides. You won’t give up any control of your business, as you would if you got investors involved.
And if you seek investors later on, they are much more likely to back you if you can prove you’ve put your own money into the business.
Bootstrapping
This means starting a business using your own money. By keeping start-up costs low and using profit as the main funding source, you can bootstrap your new business without relying on bank loans or investors.
While it might sound like an ideal and easy way to kick-start your business, bootstrapping isn’t always the best option.
It works best for business models that don’t involve heavy spending to start up, and have the potential to quickly start making money. If your business might take a while to cover costs, it’s best to consider other options. Bootstrapping might put too much pressure on your savings or credit card.
If you think bootstrapping might work for you, it’s a good idea to talk to a financial advisor or accountant first.
You may be eligible for government grants or other help to subsidise training costs and business activities.
Check out our guides to what’s available for new businesses and established businesses , including tech start-ups and Māori businesses.
Borrowing money
Many banks and other lenders offer various incentives and fee structures for small businesses.
Loans
If you’re new to business, loans might be the easiest way to get funding. You’ll still need to do some legwork to apply — and set time aside for business planning to make sure it’s the right decision for you.
Shop around for a loan that offers you the lowest interest rates.
Banks will need proof you can afford your repayments. If you’re new to business, you will most likely need to apply for a personal loan or extra borrowing on a mortgage. Once your business is more stable, other options are likely to be available.
Credit cards
Business credit cards are useful for smaller purchases.
Like bank loans, different banks offer various rates and perks. Compare terms and conditions, eg annual fees, interest rates, finance changes and cash advance options.
Your business credit card doesn’t need to come from the same bank you take a loan from or use for your personal finances — but it often pays to build up a good history with one bank. Banks might be more inclined to give better offers to clients they know and trust.
Do keep receipts for any business-related credit card purchases.
You can claim these back as expenses come tax time.
Friends, family and fools
Your personal network is more likely to trust you and accept your business case than other types of lenders or investors.
But introducing money into a personal relationship can strain ties and damage trust. The critical business acumen provided by a professional investor will also be missing.
Select who you approach carefully. Make sure you formalise the arrangement with a signed contract setting out the terms and conditions. Having it in writing will help prevent any misunderstanding or disputes.
To use your money well, it helps to speak the language of business finance — and confidently read and interpret your financial figures. Whether you’re experienced or just learning the ropes, take this assessment to find out where you need to focus.
At the end of this assessment, you will get:
- a better idea of your financial strengths and weaknesses
- practical tips and tools
- links to expert advice.
Crowdfunding
This is a popular way to get funding for creative work, but it’s also becoming a more common way to raise capital for entrepreneurial projects.
It’s much like charity fundraising. On a crowdfunding website you create an online campaign featuring your business, product or idea, and set a fundraising target. People then back your project.
You can offer incentives, eg gifts or company shares, in exchange for their money.
Do your research to make sure you pick a credible crowdfunding website. There are many, including ones based in New Zealand.
You are revealing your ideas to the public, so there are some risks to your intellectual property (IP).
Don’t use crowdfunding if you’re not fully committed to following through with your project.
By law you must fulfil promises made to backers if you reach your fundraising target.
Investors
Angel investors
An angel investor is a successful entrepreneur who puts money into innovative new businesses, particularly those run by a person or team they believe in.
They typically pick businesses in their field of expertise so their knowledge and experience can help it succeed.
They might:
- Loan you money, which you will need to pay back under their terms and conditions.
- Take a percentage of your profits.
- Ask for partial ownership of your business.
Venture capitalist investors
A venture capitalist manages funds for investors looking for significant returns in the short to medium term. They are more likely to invest large sums in high-growth companies.
Businesses that have a good financial track record are more likely to get backing from venture capitalists.
Like angel investors, venture capital firms often offer their expertise and support. However, they also typically require a significant degree of control in a business to protect their investment.
Venture capital funding is received in instalments, known as seed rounds. The amounts invested often directly relate to the business’s recent performance.
