Category Archives: funding

Funding Your Business: Borrowing from Friends and Family

lending-money

Many startups struggle with financing their small businesses. With the average cost of starting a business approximately $30,000, most entrepreneurs need to seek some source of funding beyond their own coffers. For some, borrowing money from friends and family may be their only option.

 

According to credit analyst and volunteer SCORE Portland mentor Matthew Buonopane, “The five Cs of credit are of primary concern to banks when lending to businesses. These C’s include: character, capacity, capital, collateral, and conditions. While character, capital, and conditions may be in place to the bank’s satisfaction, collateral and capacity, or a history of good operating performance, are often absent or difficult for small business owners to obtain.”

 

Using funds from relatives and friends comes with unique risks and benefits, so carefully consider the pros and cons before asking Aunt Jane to float you a loan.

Pros

  • Borrowing from friends and family may give you quicker access to cash. They probably won’t demand as much documentation about feasibility and your business plan before helping you financially.

 

  • You may have more flexibility in setting the payback arrangements so you’re not feeling strapped or overstressed as you start and grow your business.

 

  • When friends and family invest in your business, you may find they have an abundance of enthusiasm about your endeavors. Having their moral support and encouragement can keep you motivated and optimistic.

 

Cons

  • If your business fails or hits hard times, you risk hurting the financial security of those you love if they extended themselves to support you.

 

  • Borrowing from loved ones may cause your relationships to become strained if your near-and-dear lenders feel—since they loaned you money—they have a right to tell you how to run your business.

 

How Can You Borrow To Build Your Business Without Breaking Trust

First and foremost, be upfront about the risks and challenges involved in starting a business so your friends and family know what they’re getting into.

 

Also, consider these other tips before you accept funding from them:

 

  • Conduct research and do your due diligence before asking for money. Do you feel confident your business will succeed? Ask yourself, “Would I invest in this business if someone asked me to?”

 

  • Be realistic when considering what funds your business will require. Get a good handle on the costs your business will have to cover so you’re asking for an amount of money that’s in line with your needs.

 

  • Determine if the funding will take the form of a loan or a share in your business.

 

  • Craft a contract and lay out a payment plan. This will ensure you and your friend or family member are on the same page and have the same expectations.

 

Get Help In Considering All Options

Even though you may think borrowing from friends and family is your only option, there may be other viable funding resources that you’re not aware of. By contacting SCORE and setting up a time to meet with a mentor, you might learn about alternative financing opportunities. Reach out to us today. Mentoring is free of charge, and our mentors have experience in all aspects of starting and growing a small business.

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How to Pitch Your Business

When you have been developing a product for months or years, there comes a time when you have to focus on getting seed funding or other sources of investment. Pitching, just like networking in general, is about building relationships and communicating well about why your product or service is a winner. Take the time to hone your pitch and try to avoid common pitfalls.

Consider these tips:

  1. Focus on the problem you’re solving.

New entrepreneurs often talk about their companies in terms of what they do (“we make X, we offer Y”). Instead, focus on describing WHY your product or service matters. Frame your story from the end user’s perspective, e.g. “Dog owners are struggling for control when walking their pet, so we help them by…” Explain the pain point, and how you’re solving the problem. Use stories to help bring concepts to life. Bill Feldman, Portland native and entrepreneur, created the Liberty Wristband after walking his dog Henry. His dog was constantly pulling the leash of out of his owner’s hand, and Bill engineered a unique solution that he is now taking to market.

  1. Don’t use jargon.

Ditch the buzzwords, acronyms and any industry jargon that requires a dictionary or advanced degree. You want everyone to understand and connect with what you’re saying instantly.

  1. Adjust your pitch to each situation.

You likely have an elevator speech you’ve practiced. This pitch makes a compelling investment case in a minute or less, and there is a time and place to use it. When you are engaged in casual conversation, be sensitive to the give and take; don’t deliver a monologue about your idea.

  1. Don’t pitch your resume.

A good pitch focuses on what you’re doing, why you’re doing it and how it’s going to make a difference. This isn’t the time to cover the general work and educational background of everyone on the team. Don’t include all the companies where you worked or schools you attended during initial conversations.

  1. Hold off on the crazy projections.

Perhaps your friends and family are impressed with how you will grow from 10 to 10 million users in two years. Investors and experienced businesspeople don’t want their time wasted with growth projections, which are best guesses. Describe your business now and what resources it will take to scale.

  1. Consider feedback a gift.

There’s a lot of personal pride involved in any venture. Put it aside when pitching your company. Expect people to have tough questions. They’re not attacking you personally; rather, they’re thinking about your idea from their points of view. Learn how to take critical feedback to make improvements.

 

Is Crowdfunding Right for Your Business?

Startup (and even established) entrepreneurs often struggle in obtaining funding for their business growth.  Many get frustrated trying to obtain financing  traditional financing.   That’s why some entrepreneurs are turning to crowdfunding (also known as “crowd financing” or “crowd sourced capital”) as a viable way to raise capital to launch or grow their businesses.

What is crowdfunding?

Crowdfunding is a way to raise money for your business through a collective effort (primarily online via social media) that leverages your network of friends, family, customers, etc.  Online crowdfunding platforms expand your network and put your business in front of other potential individual investors who you otherwise wouldn’t have connected with.    Crowdfunding allows you to showcase your business to – and collect contributions from – many investors in a central place online.

Crowdfunding for businesses is usually approached in two ways:

Reward-based gives backers a reward of some sort, usually the product or service you offer, for contributing funds.

Equity-based allows contributors to become part-owners of your company. In other words, they trade money for equity shares of your business.

If you’re starting or running a non-profit or charity, there’s also donation-based crowdfunding. Donation-based means backers do not receive any rewards or equity when contributing.

A SCORE Maine client’s experience with crowdfunding

Kate Anker, owner/creative director of Running With Scissors Artist Studios & Community in Portland, Maine, has successfully used crowdfunding to help fund improvements to her dedicated work space which serves over 50 artists. In March of this year, she launched a 30-day fundraising campaign through the crowdfunding platform Kickstarter to raise money to build out the infrastructure of her studio space and buy new equipment.   By the end of the campaign, she exceeded her goal of $25,000 with the contributions of 284 donors.

“Those funds are helping us to better serve our core community and enhance their creative process, accessibility and growth,” explains Anker. “Specifically, we are developing a small photography shooting studio, a screen printing room, a safer and fully-functioning wood shop, lighting for our gallery, and a glaze spray booth and kiln hook up for our ceramic department.”

Anker shares that anyone starting a crowdfunding campaign of any kind must be prepared to devote a significant amount of time to its creation.  Communication is key throughout a crowdfunding campaign. You need to be diligent about keeping donors and potential donors informed and aware, and keeping your message fresh and engaging. She also recommends you have your planning and preparation done in advance – including attention to back-end details like your website, blog, community connections, press releases, and marketing strategies and ideas.

Crowdfunding platforms for small businesses

Below is a list of several crowdfunding platforms (shown in alphabetical order) you might consider for your business. Finding the best fit will depend on your type of business and your goals. The various crowdfunding sites’ fees (percentage of contributions and processing fees) you would pay as a campaign creator vary. We suggest you explore the options thoroughly before deciding to use one of these or other available platforms.

CircleUp

Crowdfunder

Crowdsupply

Fundable

Fundrazr

Growth Venture Community

Indiegogo

Kickstarter (for creative ventures)

MicroVentures

Peerbackers

Sprowd 

While participating in crowdfunding as a source of financing doesn’t guarantee a business will be funded, it could improve its chances because of the sheer volume of potential investors it’s exposed to.

Want to learn more about crowdfunding? Check out these resources and articles:

Introduction to Crowdfunding for Entrepreneurs via U.S. Small Business Administration

Crowdfunding – Is it Right for Your Business? Where Do You Start? via U.S. Small Business Administration

The JOBS Act: Crowdfunding for Small Businesses and Startups (Book)