Do you want to open a new retail store or local services business in your community? In this video, I talk about what it takes to raise money to launch your business and get it off the ground.
Prefer to read instead of watch? Here’s a rough script I used for this video.
A few weeks back, I received an email from an individual in Sioux Falls that was looking to start a local services business. They were very protective of their idea, so I don’t want to say what the business idea was, but for the sake of this discussion, let’s say it was a gym. The person had no previous experience running a gym, let alone any kind of business, and had no significant financial resources to put behind this project. They had put together a lengthy and well-researched business plan and they had talked to some of the state agencies and non-profits that help small business owners get started.
The next step for them was to raise capital for the build-out of the space they had identified. For discussion purposes, let’s say they needed about half a million dollars to build the fancy gym they wanted to build. Their expectation was that they could just get a loan from the bank or have a wealthy investor write a check to fund the initial launch and operations of their business. They had already learned an SBA-loan wasn’t going to be enough to secure their funds because they had no money to put down as collateral on their loan. Their next step was to go looking for an investor that could fund their business and I happened to be the first place that they landed. So, I had a nice discussion with them and told them what their options were to get the initial cash to fund their gym given their situation. So, in the remainder of this video, I want to discuss some of the ways that you can secure money to start your own retail or local services business.
But before we discuss how to finance your business, it’s important to understand that starting any kind of business is a risky endeavor and taking on the financing of any kind tends to increase that risk. Most new small businesses fail after the first few years, and that’s just the reality of the situation. Entrepreneurship is inherently a high risk, high reward proposition. If it goes well, you could make a lot of money. If it goes poorly, you could lose all of your money. When you bring a loan or an investor into your business, you’re magnifying that risk. Not only are you putting your own money on the line, but you’re also putting someone else’s money on the line too. And if it doesn’t work out, they’re going to look to you to pay them back over time. So, before thinking that an investor or a bank loan is free money that you can pay back with revenue from your business, understand that bringing on other people’s money can increase the amount of personal financial risk that you’re taking on depending on how the loan or investment is structured.
Now, let’s say you’re okay with that level of risk. There are two types of investments you can get in your business. One is debt where you owe a bank or someone else money and the other is equity, where an investor takes percentage ownership in your business. While most technology startups take on equity investors, local retail and services businesses tend to take on debt. There are a lot of different ways to take on debt. You could even finance your business with credit cards, but that’s generally not a good idea.
Really, the best way to borrow money for your business is through a loan backed by the small business administration or the SBA. With the SBA’s various loan programs, banks will give entrepreneurs the opportunity to get a loan they normally wouldn’t qualify for because the SBA is guaranteeing the loan. It certainly is a process to get an SBA loan and they are probably going to expect you to bring some of your own money to the table, but getting a bank loan backed by the SBA is typically the most realistic path to funding your business. If you don’t have money for a down payment, you’re probably going to have to work a part-time job or do some kind of side hustle over several months to get that down payment in place. The other option is to get an investor for that portion, which we’ll talk about in a minute. There are a lot of different types of SBA loans, so if you think this is something you want to pursue, go book an appointment at your nearest SBA district office and they’ll walk you through it. In Sioux Falls, the SBA is located at the Zeal Center of Entrepreneurship and you can find all of the information you need about SBA loans at SBA.gov.
If an SBA loan isn’t an option for you or you need money your down payment, your next step is probably going to be seeking an investor. You’ll quickly discover that many angel investors, including myself, don’t invest in local retail and services businesses no matter how good they sound on paper. The issue is that the risk-reward return ratio typically doesn’t make sense. You’re taking on all the risk by funding the business up front and if you’re lucky, you’ll break even somewhere between five and ten years. That’s just not especially appealing to some investors.
If you’re looking for an investor, you really need to find someone who has financial resources that’s excited about your business and wants it to exist in the community. Last year, there was a guy named Zak Tenneboe that wanted to open a haunted house in a warehouse in Sioux Falls. Cool idea, but not something I would invest in. On the other hand, my friend Trevor loves unique entertainment venues and bringing new business ideas to market, so he jumped at the chance to be involved as an investor and an advisor in the business. Investors really need to have a vested interest in your business idea, because realistically they are going to be your business partner for years. It has to be more than just a financial transaction for the investor for them to want to bite.
This means you’re going to have to sit down with a lot of investors before you find the one individual that has the financial resources to back your business and is excited enough about the idea to back it. I told the individual that I met with they would probably have to make 100 coffee meetings before they found the one resourced individual that might take a risk on them. It really is that much work.
The third option to fund a retail business is crowdfunding, which is a viable fundraising mechanism for businesses that already have a community around them. In Sioux Falls, there’s a business called GameChest that is kind of a community gathering place for people that play board games. Their customers wanted to get some better amenities at the store, think tables and chairs and stuff like that, at GameChest, so their customers all pitched in a little bit and paid for the upgrades themselves. They already had a community that cared about their business and that community wasn’t afraid to put their dollars toward the business they cared about.
Some people look at crowdfunding their business idea and just see it as free money, but successful crowdfunding campaigns are a lot of work and most of them fail. Many successful KickStarters already have their full amount lined up from individual backers before they ever launch their campaign. You can’t just launch your Kickstarter campaign and expect people to start throwing thousands of dollars at it. There’s much more that happens behind the scenes to make these things successful that you really need to research and understand before launching a crowdfunding campaign.
Those are probably the main three general options to launch a new local retail or services business in your community if you don’t have the financial resources to fund it yourself. It can be very difficult to raise money to launch a business, but that’s the nature of the beast. Starting a business, creating something from nothing is a hard thing to do. If you’ve found a way to creatively fund your business, I’d love to hear about it the comments below. Thanks for watching.