How to finance your new startup
After painstaking deliberation, you have decided that your business idea is worth pursuing and now is the time to make that dream come true. Now there is one significant challenge that you need to overcome…where will you get the money to make it happen?
The first step you should take is to develop your business plan. A business plan is a critical tool that will be required for creditors or investors if you apply for some types of financing. But regardless of what path of financing you go down, your business plan should act as a roadmap that guides you to success.
Review some of the options below and consider the size and scope of your proposed business, as well as your own personal financial situation as you determine which option is best for you.
Self-financing is a method in which the business owner provides his or her own capital to launch the venture. The capital comes from the entrepreneur investing and risking his or her personal assets. The most common sources of personal assets used to finance a business are savings, home equity, stocks, bonds, 401k/retirement accounts, personal credit cards and cash-value life insurance policies.
This type of financing is the most popular form of business startup funding and typically carries the most risk for the entrepreneur. The benefits of self-financing are that the entrepreneur retains total ownership of the business, and there is complete personal accountability for the success or failure of the venture.
While most of us have utilized banks to conveniently finance our homes, automobiles and lines of credit, obtaining funds for a startup is not quite as streamlined. Even with a solid business plan, securing funds from a bank is a difficult proposition because they require collateral or proof of income to guarantee they will be paid back.
Many financial institutions, however, participate in SBA loan programs. The loans are not supplied by the SBA, but are guaranteed through them, making a business loan easier to obtain. If you meet the criteria specified for a particular type of funding, such as 7(a), Microloan, or CDC/504, you are more likely to secure funding.
Family and friends
Family and friends can be a low-cost and relatively easy source for financing a new business. This is typically a more viable solution when the amount being borrowed is $100,000 or less.
For this type of funding, the terms of the agreement should be written down and made into a binding legal document. This helps to protect both borrower and lender financially while potentially limiting the amount of damage caused to an otherwise loving and trusting relationship if the startup were to fail.
Finding investors to finance your venture is another viable option given the right circumstances. Unlike borrowing money from family and friends who are looking to recover their loan and possibly some modest interest, investors will exchange financial resources for ownership in the venture. Investors also expect the entrepreneur to make a significant capital contribution in the startup.
Startups that are viewed as potentially high-growth, high-risk and capital intensive are more attractive to and better served by venture capitalists(VCs). Keep in mind that most VCs will require a controlling stake in the venture with the ultimate goal of selling their interests for much more than their initial investment.
Vendors and Customers
In some cases, you may be able to let vendors finance your startup. Although your startup doesn’t have established credit, if you have good personal credit and are willing to pledge a personal guarantee, many vendors will supply equipment, inventory and supplies on net terms.
The same is possible with customers. If you are able to sell your products and services before you have fully created them, you can use those funds to cover your startup expenses.
There are several other financing options available such as small business grants and crowdfunding, so it’s important to do your research and explore all of your options before you choose a path. Consider the advantages and disadvantages of each option and keep your business plan in-hand to make sure you're staying in line with what you set out to accomplish.
Alyssa Gregory is a small business consultant, writer, speaker and collaborator who has been helping start and grow small businesses for 13 years. She is also the founder of the Small Business Bonfire, a free social, educational and collaborative community for small business owners.