Funding & Financing
Even if a web hosting business can be started on a shoestring in some cases – proper financing gives you a better start and better chances to make it through the first 2 years. As you probably know – most startup businesses do fail within the first 2 years of their existence. You do not want to be one of them.
There are several ways for you to get financing or funds to start your business. The most common ones are
– Money from savings and your existing job income
– Bank loan
– Venture Capital
Often an entrepreneur uses existing funds to start a business. Money taken from savings accounts or from other financial sources of yours, are the best way to start your business. The only person you owe money, would be yourself. Nobody can require you to do this and that different from how you would like to do it. If you still have a job while starting your business – finance your business with the income from your job until you are ready to make the final step.
Startup businesses without a credit history will have a hard time to get a credit card or a loan from a bank. If you as a person have good credit, you might be able to get the loan as an individual. Keep in mind – in that case your personal assets are basically securing the loan. Depending on the amount of money – this can be risky. And as you know – banks are not hesitating to close the loan and hand it to a collection service if they feel their loan at risk because you are not making your payments. Not a good feeling. A bank loan also puts a higher pressure on you to succeed. While some people have no problem handling this additional pressure, others do have a problem with it. If you know that you are one of these individuals – do not take out a bank loan to start your web hosting venture.
Venture capital – Unless you are having really big plans, you will be locked out from receiving venture capital from one many venture capital providers out there. Don’t even try and waste your time. These people do not fund small businesses where the ROI would be minimal for them. But – there is venture capital out there, that will be available to you. Often even for less cost than what you would have to pay somewhere else. Family members, friends, coworkers and business partners are all potential sources of venture capital to help you start or to expand your existing small web hosting business. The key is approaching them the right way.
Draft the terms of your loan and review your payment schedule.
How much money do you need to borrow?
What fair interest rate would you be able to offer?
Instead of paying interest – can you offer a share (e.g. 5%) of the business? Or maybe you do not take a loan – you offer an investment opportunity?
When will you start repaying the loan, and over what period?
Identify potential lenders and investors.
Think about all people you know who might be in a position to lend you money or who might be interested in investing into your business. It could be a relative, friend, associate, just about anyone you know and trust. Prepare your proposal the same way you would if presenting your proposal to a bank or a real investor. You are asking for money – so, make sure your request looks legit and professional. Offer a fair deal and the necessary respect. Remember – in the moment you ask, you need to convince your family (just as an example) that you are not that 25-year-old college dropout, but a businessman/woman who was an exact idea of what he/she wants.
You can email your loan proposal to them along with a custom message. But – that should only be done if they live far away and you cannot drive over to the person you are asking. Also – do not surprise them just like this. Call upfront and make an ‘appointment’ where you would like to discuss something important with them and that you will email them some information before then. Be professional.
If the person you are going to ask for a loan or an investment lives in driving distance – drive out there. Bring enough time and do not start asking the moment the door opens. Be polite, be professional. Explain your idea, present your business plan, and explain why you are there. Explain every step and describe thoroughly what you will do to pay back the investment or loan. Be prepared and also explain what you will do in case of failure. How will you pay back the money if your business model does not work and you end up closing it down? Always put yourself into the position of the person being asked, too. It will help you cover questions and concerns.
The moment of truth – The lender responds to your loan proposal.
The person receiving your loan proposal can respond in one of three ways. He/She can:
Approve your proposed loan terms and accept all your terms. Congratulations – you did a great job explaining what your plan is.
Suggests alternative loan terms: your lender does like your plan, but is not accepting your terms. The lender/investor will make alternative suggestions for the terms of the investment/loan. It is up to you to respond. If you did your homework well, you already prepared a plan B with different terms (better terms for the investor/lender). Don’t feel offended, if being asked to provide different terms. You still did very well and you are almost there.
Rejection of your loan proposal: If this occurs, you should try to find out why they rejected the loan proposal. If it makes sense, you can present a modified proposal that contains different loan terms at a later time. But, to be honest – in 99% of the cases you are better off asking somebody else or to come up with a complete different idea of funding your business with venture capital.
As mentioned already at a different topic – the SBA is providing help and funding. Talk to them. It does not cost you anything to talk to somebody who is there to help.