After inspiration for a brilliant business idea strikes, one of the first questions that comes to mind is usually: How will I fund my business?
Unfortunately, having a brilliant idea doesn’t mean people will immediately start throwing money at you (at least in most cases). On the plus side, there are many funding options available for budding entrepreneurs—both classic methods and more creative approaches.
In this article, Paul Saunders, the founder and CEO of James River Capital Corp., shares his best advice for entrepreneurs seeking business funding. By using these funding strategies, you’ll be able to launch your business and bring your idea to life.
About Paul Saunders
Paul Saunders is the founder, chairman, and Chief Executive Officer of James River Capital Corp. and affiliated companies. A lifelong passion for finance led Saunders to earn a B.A. from the University of Virginia and an M.B.A. from the University of Chicago.
Saunders’ career has spanned roles in investment banking and in investment and trading. He has held positions in the Corporate Finance Department at Warburg Paribas Becker and in the Commodity Department at A.G. Becker.
He was also the Director of Managed Accounts and Commodity Funds at Kidder, Peabody, and Co. before serving as President of KP Futures Management Corp. In 1995, Saunders acquired the firm, which was then the alternative investment department of Kidder, Peabody, & Co. He changed the name to James River Capital Corp. and transformed the business into an independent investment firm.
Saunders’ passion for finance is matched by a passion for philanthropy, which is shared with his wife of 39 years, Vicki. The couple recently launched their own organization, the Saunders Family Foundation, and they regularly support other charitable foundations.
About James River Capital
James River Capital Corp. was officially founded in 1995, when Paul Saunders and Kevin Brandt acquired the firm from Kidder and transformed it into an independent investment firm.
Based in Richmond, Virginia, the firm is registered as a Commodity Trading Advisor and Commodity Pool Operator with the CFTC and as an Investment Advisor with the SEC.
James River focuses on asset classes including corporate credit, equity strategies, global macroeconomic strategies, fixed income arbitrage, multi-strategy investing, managed futures trading, asset-backed securities, and more.
Tips for Entrepreneurs on Funding Startups
Paul Saunders founded James River Capital in 1995 and has run a successful business ever since. With an emphasis on creation rather than competition, Paul enjoys sharing his secrets to success with others. Here are some of his top tips for entrepreneurs looking to fund startups.
“Bootstrapping” refers to funding your business through personal savings, credit cards, and/or borrowing from family and friends.
For budding entrepreneurs, this is the best place to start. Although bootstrapping may not fund your entire business venture, it can often cover some of your startup costs. And spending more time to build your savings can be worth it, since you won’t have to give up any equity or control to other parties.
Plus, investors and other sources are more likely to contribute money if they see that you’ve already contributed yours. This means that you have a vested interest in the business and will work hard to ensure its success.
Contributions from friends and family members also lend credibility to your business venture. After all, if your friends and family don’t believe in your idea, why should investors?
Of course, as Paul Sanders points out, some people are not able to utilize these options, and some business ideas require larger investments. Fortunately, there are many other methods of funding to explore.
A newer source of business funding, crowdfunding campaigns stem from a large group of people giving varying amounts of money in support of an idea. Kickstarter is an excellent crowdfunding platform that allows your supporters to pledge to goals and tiers set by you.
When people pledge money through crowdfunding, they are not expecting to be paid back for their support. However, some campaigns offer incentives like T-shirts or the ability to pay for future delivery of the product now.
If you decide to go the crowdfunding route, you will need to market your idea. Most startups use social media to gain a following for their idea and raise awareness of their crowdfunding campaign. This platform is great if you already have a social media following or if you think your product/service will fill a high-demand gap in the market.
Many businesses launched through crowdfunding have become massively successful. One example is the Oculus Virtual Reality Headset. The campaign raised $2.4 million, and the product was acquired by Facebook for $2 billion while still in the prototype stage.
There are several types of business loans available for entrepreneurs, including bank loans and loans from the Small Business Administration (SBA).
Bank loans have lower interest rates, but the approval process is often lengthy. SBA loans, while slightly more expensive, are easier to quality for than bank loans. For both, you will need to have a strong credit score.
You can also open a business line of credit. With this option, the lender approves you for a pool of funds that you can use as needed for your business. You pay interest only on the money that you use. Once you pay back the money you’ve used with interest, the funds are available for you to use again. Interest rates and approval processes vary.
If your credit score is lacking, you may want to look into equipment financing. You’ll receive a loan for the upfront cost of the equipment that your business needs, then pay back the loan (with interest) with fixed monthly payments. The equipment is used as collateral for the loan, so equipment financing is easier to qualify for, even with a lower credit score.
Local funding is another type of loan that is often overlooked. Paul Saunders recommends going to your Chamber of Commerce, which will be able to give you information on how to secure local funding.
They may send you to your local business development center, which are often located at universities. Business centers can put you in contact with other entrepreneurs so you can network and meet other investors. They also go over loan information and can assist you in applying for local loans.
Local investors and business centers are typically thrilled that you want to develop a new business in the area and will be happy to assist you.
Angel investors are generally individuals looking to invest in business ideas that they find promising. Angels can invest upwards of $10,000 in a business idea. You can find angel investors through the Angel Capital Association (ACA).
They assist with direct loans and sometimes host networking events that can connect you with potential investors. If you’re wary of finding investors online, you can also check for angel groups in your local community.
Venture capitalists use money from their clients to invest in companies that they believe can give them a high return relatively quickly. They will be looking to receive 3-10 times what they invested within 5-7 years.
Paul Saunders cautions that if you plan to pitch your idea to venture capitalists, you will need to be extremely well-prepared. Venture capitalists invest large sums of money and expect a very detailed, thorough, and carefully compiled business plan.
You can find venture capitalists through your existing contacts, or you can pitch your idea to the National Venture Capital Association.
A final option is to exchange stock in your company for capital from investors. This arrangement is beneficial because you don’t incur debt and won’t need to quickly generate income to pay back loans.
The drawback, however, is that you are giving up a degree of ownership and control in your company. The investor is now tied to your business. This does mean that you can leverage the investor’s contacts and network moving forward, but it also means that you are unlikely to recover equity once you’ve parted with it.
Some entrepreneurs also provide services in exchange for capital. For instance, you may negotiate free office space in exchange for providing technical support for the other office tenants. Get creative: What do you need and what do you have to offer? There’s no harm in asking around and seeing what innovative solutions you can find.
The first steps to building a business can be challenging. If one source of funding doesn’t work out, go back to the drawing board and try another. Persistence will be key in successfully bringing your business idea to life.
Remember that you have a wealth of options, including:
- Personal savings
- Loans/contributions from friends and family
- Business loans/local loans
- Crowdfunding campaigns
- Angel investors
- Venture capitalists
- Trading equity or services for capital
Paul Saunders recommends that you think about what type of company you want to create, then decide which resources are best suited to your needs. Just as Paul Saunders built a company that has flourished for over two decades, you can fund a business venture that brings you prosperity and success.