Whether you are just starting out or your company is experiencing growth and you want to develop a new product, one of the most expensive parts of the process is research and development. Why? Because failure is a part of the equation, and depending on the project, failure can be expensive.
Getting funding to complete this process can be a challenge depending on the stage of research and development you are in. In the early stages, the likelihood of total failure is greater, so any investment is at greater risk. Later in the process, it may be more a matter of refinement than scrapping and starting over.
No matter what stage you are in, there are five simple ways you can pay for research and development. The method you choose may depend on a number of factors.
Personal or Business Savings
Of course, the best way to pay is if you have saved money for your business, and you can operate out of a bank balance. There is no interest or obligation to investors in this particular method. Both risk and responsibility rest with you.
Of course, the limitation with using this method exclusively is that your funding is limited by the amount of money you have in the bank. Once you run out, regardless of how close you are to completion, you will either have to save more or find another source of funding. Often getting started is the roughest part, and once you have developed something, especially if others can see you invested your own money first, you can get some additional funding through other means.
Another way to get funding is to borrow against assets your business owns or your personal assets. Because of the risky nature of research and development, this is often an easier way to go if you need to borrow money. Usually loans are lower interest and since you are securing the loan, they are also easier to get.
The con, or the risk if you will of this type of loan is twofold. The first is the same as savings, you can probably only borrow what the item is worth or what equity you have in in, meaning your funding is somewhat limited again by the value of your assets. Additionally, unlike savings, if your idea fails or you run out of money, you will still be left with a debt to repay, which brings us to the second disadvantage.
When you secure a loan, you put your business assets or your own at risk. Should you fail for some reason or if your idea does not take off, you still have a debt to repay. If for some reason you are unable to pay the debt, your assets can be at risk and seized by the lender to pay your debt. You will have to evaluate if this kind of funding is worth the potential risk.
Secured borrowing is easier funding to get, but you can get some capital without the need to secure the loan. There are a couple of ways to do so.
- Credit Cards: Credit cards are usually unsecured, and they have limits. Both personal and business credit cards work, although it is better to use any business card you have first. That way, you are building your business credit, and if you have set things up correctly, limiting your personal liability for business debts.
- Personal or Business Loans: You can get unsecured loans for research and development and provided both you and your business have decent credit, they will not cost you too much, but even if you have poor credit, you have lending options. The loan will just cost you more over the long term.
Like other forms of lending, there are generally limits on credit cards and only so much funding you can qualify for. This means your funding is somewhat limited as well, and just like secured loans, whether you are successful or not, you will still owe a debt at the end of it all.
If you take out a personal loan, there is also a risk to your credit score, something to consider when you go to borrow. Never borrow more than you can afford to repay.
Venture capital is another option, and it is not quite the same as borrowing. Usually instead an investor puts a certain amount of money into your business in exchange for a percentage of future interests. Rather than interest, they get a share of the profits.
If your idea is good enough, and you are good enough at presenting it, venture capital, or VC, can be pretty easy to get. The key is you must be willing and able to share your revenue on the other end. If you already have agreements with other partners, they may wish to be informed of the new deal, and you may actually need their approval.
Depending on the contract and percentages, this can be a great deal, but be careful not to risk too much before your idea is further developed. Look over contracts carefully about what rights their part ownership grants them.
The good thing about VC is that if you are close, you can always negotiate for a little more money by increasing the percentage of return. Also, unlike other loans, the payout the investor received is based on your success. If you fail, they get nothing. This is why the contract and percentages is very important at this stage.
Family and Friends
Probably one of the most common and least desirable methods of raising money is to borrow from friends and family. While this is possible, the loan should be treated as any other loan. You should have a contract or at the least a written agreement of some sort. A repayment method should be outlined, and payments should be made on time.
Countless friends and family relationships have suffered because of loans and borrowing gone bad, so be careful here. Don’t risk your relationship for the sake of some extra money.
These are five of the most common ways to fund research and development. As with any financial endeavor, the one that is right for you may be different than these, but this list is a good place to start.