Funding options for your beauty business
There are many options to consider when looking for ways to fund your business. Some of the options require more work, like applying for grants or running a crowdfunding campaign, while others require less work but carry more financial risk, like getting a loan or using credit cards. A combination of funding sources is often the best route to take.
Factors to consider:
- How good is your credit?
- How much financial risk are you willing to take?
- How strong is your network?
- What is your time frame for securing funding?
- What are you willing to give investors?
It’s important to honestly assess your financial situation. How good is your credit score? A high score can secure you some low interest loans. If your score is low, your interest rate is likely to be high. If you are concerned about your application being denied, you can look into loans backed by the Small Business Administration (SBA). Always remember to check the fine print of loans and credit cards. An SBA loan, for example, must be repaid even in the event of bankruptcy, putting your personal assets at risk.
Weigh the risks before using credit cards to fund your business. Debt with compounding interest can be hard to escape and you could end up paying off debt for years. Borrowing from friends or family comes with the risk of damaging your relationships over a misunderstanding around expectations.
How strong is your network? Are you starting your business with an existing customer base? A strong network or social media reach can help you fund your business through crowdfunding. Your network can also be invaluable for when looking for angel investors.
Crowdfunding and finding investors takes time. If you need money quickly, credit cards may be the best route. If you have time to put toward securing funding before launching your business, you may be able to avoid the risks that come with credit cards and loans.
Finally, ask yourself what you’re willing to give investors in return for their money. Will you offer equity? Are you willing to give up some control of your business and share decision making power? It’s helpful to think about this before you are faced with the decision and money on the line.
Funding options to consider:
- Your own money
- Venture capital firms or angel investors
- Money borrowed from friends and family
- Bank loan
- Loan backed by the Small Business Administration
- Grant money
- Credit cards
Funding your business with your own money
If you have enough money to fund your own business, this route has many benefits. Not only will you be able to keep all of your profits and decision making rights, but you won’t be amassing debt.
Even if you don’t have all of the money you need now, you can still choose to bootstrap. There are many ways to save money while starting a business, including doing most of the work yourself and hiring interns rather than professionals. Be aware that bootstrapping can lead to burn out. If you are working a job on the side and can’t afford to hire the help you need, you can really wear yourself out. A solid business plan and well thought-out budget will help you stay on the right track if you choose to self-fund.
Raising funds with crowdfunding
Crowdfunding gives you the opportunity to test out your marketing, branding, and products before your launch. You can receive feedback from the public while raising money. However, crowdfunding can be a long and involved process. Also note that crowdfunding platforms take a percentage of the money you raise.
There are 3 main types of crowdfunding platforms. Go Fund Me is an example of a crowdfunding for donations, where you can raise donations without offering anything in return. Although Go Fund Me is regularly used to raise money for charitable causes, it can also be used to raise money for a new business.
Crowdfunding for equity involves giving investors a portion of your business in exchange for their investment. This can be worth it for a business that needs to raise a large amount of capital. The platform Fundable recommends equity funding for businesses raising over $50k and recommends that businesses already have social proof.
Platforms like Kickstarter and Indiegogo offer people rewards for donating. You can offer a variety of rewards, including limited edition products or a mention on your website. Be prepared to fulfill all of the orders that come from reward based crowdfunding. There are plenty of stories of businesses who hurt their reputation by failing to deliver products as promised. Plan ahead so you don’t become one of those stories.
Some platforms require you to reach your financial goal in order to receive any of the funds. Some entrepreneurs choose to hire a crowdfunding expert or manager to ensure a successful campaign. Campaigns also require a lot of promotion and marketing, which may cost money as well.
Angel investors and venture capital firms
Angel investors and venture capital firms are another way to fund a new business. Angel investors are more likely to support beauty startups and other small businesses. In addition, they may offer to mentor you and introduce you to people in their network. Venture capital firms prefer to work with established businesses who can show a track record of success. Angel investors generally invest up to $250,000, whereas venture capital firms are willing to make a much larger investment.
Angel investors don’t charge interest and often provide mentoring. If your business fails, you don’t need to pay them back. They often expect a portion of your business in return for their investment. This means they get a cut of your profits as well as decision making power in your business. Additionally, angel investors can be hard to find and they are picky about which businesses they choose to invest in.
To find angel investors, ask within your business network and search on sites like angel.co and SeedInvest, which match businesses to angel investors. Do your research and make sure an investor is a good fit before approaching them. The process of securing funding from an angel investor can take a lot of time and energy so don’t waste time approaching investors that aren’t a good fit.
Be sure to create a game plan before approaching potential investors. Will you show them product samples or a powerpoint presentation? Do you have social proof or other evidence that your business will do well? Give them a good reason to trust and invest in you.
Borrowing from friends or family
If you choose to borrow from friends and family, be sure to write a clear agreement so that everyone has the same expectations. Be realistic about your timeline for paying back what you borrow and don’t promise things you can’t deliver. Clear communication up front will help you protect your relationships.
Getting a bank loan
If you have good credit, a business loan can be a quick way to secure funding. You won’t jeopardize your relationships by borrowing from friends and family, and you can save yourself the time and effort needed to run a crowdfunding campaign.
Most business loans offer a much lower less interest than credit cards. However, many banks don’t want to offer you a loan unless you already have cash coming in. You may need to fund your business in another way until you can get off the ground and show that your business can succeed. In addition, you may need to use another asset to secure your loan, like your car, home, or inventory. Without collateral, it may be difficult to secure a bank loan.
An SBA loan is another option. The Small Business Administration doesn’t loan you money, instead, they help you secure a loan by guaranteeing repayment of part or all of your loan. Their guarantee gives lenders a reason to take a risk. An SBA loan can sometimes offer better terms than a traditional bank loan.
The process for getting an SBA loan can take longer than applying for a traditional loan. In addition, you still need good credit and may need collateral, as well.
Getting a grant
Applying for grants is another avenue to fund your business. With a grant, you won’t pay interest on the money you receive and may even get some press from the organization offering the grant.
The competition for grants is high. For example, FedEX awards only 10 grants per year and had over 13,000 applicants in 2019. It can be helpful to search for grants that fit your specific niche. Anything unique about you or your business could be the basis of a grant. Grants offering less money may have less applicants. If you choose to apply for grants, set a lot of time aside to fill out the applications and make sure you have a backup plan.
Using a credit card
Credit cards are the quickest and easiest method for funding your business. If you do end up going out of business, you may be able to negotiate on the remaining amount you owe. Keep in mind that credit cards usually have higher interest rates than loans and interest can pile up quickly. Every new business has the risk of failing. Take some time to think about what you are willing to risk to fund your business. You’ll need to prepare your business plan and budget before seeking funding.
Ready for the next step?
Learn How to Launch a Beauty Product covers every aspect of starting a beauty business, from creating a solid foundation and getting funding to manufacturing, branding, sales, and marketing. This guided approach keeps you on track and makes the process feel less overwhelming. To learn more about turning your product ideas into reality, sign up for our newsletters and read more about the course here.