7 Ways To Finance Your Startup
Okay, so I get it.
You have this great idea for a new business.
It’s groundbreaking.
It’s revolutionary.
And you are really excited to get it off the ground- to bring it to life. You do your market research. You put together a business plan. You prep some mockups and prototypes and tests. You know this product or service is going to fly and that the market is going to eat it up.
You are ready to go.
And then you start to put together a budget of what it’s going to cost to launch your business. You’ll have some legal and accounting fees upfront. You’ll need some liability insurance. You’ll probably need some inventory or supplies or equipment. You might need some warehouse or retail space. Labor may be required in addition to your own.
And the list goes on...
No matter how big your projected margin might be, it’s hard to escape all the costs that are necessary to get your business up and running.
It’s hard to escape the fact that you need cash.
Unfortunately, for many entrepreneurs, this is where their dreams of starting a business come to a screeching hault. That’s right, finding capital is one of the biggest roadblocks for entrepreneurs.
Period.
So today, in an attempt to help entrepreneurs that are in need of capital, I am going to lay out 7 different potential sources of funding for your startup or new business venture. By the end of all this, you’ll know where to look to get the capital you need!
I’ve compiled a list of all 7 sources into a free Startup Finance Guide just for you! So be sure to download it and check it out! For now, I’ll walk through a few of the options immediately available to you.
1. Bootstrapping
Alright, so this may not exactly be a traditional source of capital for a business, but it is certainly one way of getting a business off the ground. Bootstrapping is essentially putting what little cash you have as a founder into the business to fund the first round of inventory, equipment or other assets necessary to service customers.
Once profit is realized from selling off this first round, you then reinvest that profit into the business so you can buy a little more inventory or invest in other assets needed to scale. Once you turn the inventory a second time, you use the slightly larger pot of earnings to purchase even more inventory and assets. And if you do it right, this cycle continues to repeat itself and the earnings snowball continues to grow and grow. Eventually, the snowball will grow to a point where you can pull some of the earnings out of the business and onto your personal balance sheet.
One of the great things about bootstrapping is that the risk to the entrepreneur is relatively low- the only asset on the line is the cash in the business. There is no debt. No creditors. No risk of bankruptcy. However, the downside to this approach is that it can take a long time and a lot of asset turns for the earnings snowball to grow to a significant size. That said, if you’re patient and consistent, bootstrapping can be a great way to fund your business and get it off the ground.
2. Credit Cards
Admittedly, I am not an expert on credit cards- and I’m not generally a fan of them in the context of personal finance either. However, I do know people (I guess you’d call them credit card gurus) that have figured out ways to pull enough cash out of the little plastic blades to finance a startup or two.
Are the interest rates high? Absolutely.
Are there limits to the amount of capital available? Certainly.
Are you screwed if you stop making payments or otherwise default? Heck yes.
Thus, this is definitely not a route that everyone should take in order to finance their business. However, if you (a) just need a little bit of cash to get things going, (b) always find a way to make your payments, and (c) literally have nowhere else to go, then this probably isn’t a terrible option for you. Don’t get me wrong, it presents some pretty serious risks, especially if you start using multiple cards to get the cash you need. But if you can’t find capital anywhere else and you are ready to face the consequences of failing to make payments in the event your business fails, then this might be worth a look.
3. Friends & Family
This isn’t a real novel idea, but it’s certainly one that you should consider if you have friends and family that might be interested in supporting your endeavor. And there are several ways in which you can structure financing from friends and family. For example, maybe you just need a little bit of cash to purchase some inventory and once you get that inventory turned the first time, you’ll easily be able to pay back your friend or family member. In this case, it might be best to structure the deal as a loan to your business that accrues interest. Once the loan is paid back, you both go your separate ways.
However, if you need a larger amount of cash, it might be easier to convince someone to give you the capital you need if you are willing to give them an ownership position in the business. Thus, you would be bringing someone on as an equity partner. In this scenario, in exchange for putting cash into the business, your friend or family member would receive an interest or ownership stake in the company. This type of deal is quite a bit more complicated to work out from a legal and accounting perspective, but it can definitely be done.
I’m not going to go into the details of why taking money from friends and family can be a bad idea- I think it’s pretty obvious. Money has ruined far too many personal relationships and so you should spend a lot of time thinking through whether financing your business is worth the risk of possibly ruining the relationship you have with the guy / girl writing you the check. With that said, if you have friends or family members that truly support you and want to take the leap with you, this can be a great way to get the money you need to jumpstart your business.
4. Traditional Bank Loans
When it comes to funding sources for businesses, a bank is probably one of the options that immediately comes to mind for most people. And while a bank can be a great partner for an established business, they are not often big fans of startups or new businesses. Why? Because startups have a high failure rate and bank shareholders don’t like the word “failure.”
That being said, don’t count banks out of the startup game completely. If you’re flexible and you play your cards right, you might be able to get a bank to bite and give you a little cash to get going.
Here’s how.
First of all, if you’re going to ask a bank for money to fund your startup, you need to have some type of business plan to show the lender. Banks have systems, processes, and procedures they use for evaluating lending opportunities. The first guy you talk to doesn’t make the decision and is going to need something tangible that he can pass up to the analysts and underwriters for their evaluation of the deal. So if you don’t have plan, then you aren’t going to get super far with a bank. Not sure how to write a plan?
Second, remember that banks like tangible stuff- things they can touch, see, or hold. They call this collateral (real estate is their favorite). It’s one of the ways they mitigate their risk. If the business goes belly up, they’ll grab the collateral and sell it to reduce their losses. So if your business involves hard or tangible assets like equipment or real estate, it will be easier to get a bank to consider lending to you. If your business does not involve these types of hard assets, it may be harder to convince the bank to help you out (but still give it a try!).
Third, you have to remember that there are a lot of banks out there. Just because #1 says no doesn’t mean #2, #3, or #4 will also say no. Shop your idea around, ask questions from the banks that turn you down- why did they turn you down? Is there anything you can do to get them interested? Are there any government programs that might be available to help you out? Don’t give up with the first “no.” Keep pushing and refining your pitch based on the feedback you get. You might get a “no” from the first four banks, but number five might say yes.
Finally, just because a bank doesn’t like or get your idea doesn’t mean they don’t like or get you and aren’t willing to work with you to get you the cash you need. What do I mean by this? Remember how I said banks like tangible stuff that they can see and hold? Do you have a house with equity? Do you have a plump 401k plan? Do you have a few big toys out in the shed that are paid off? Do you have a valuable collection? If you are really passionate about your business and you are truly ready to make the leap, then a bank might give you a loan if you are willing to put personal assets up as collateral. Is this ideal? No. Would I do it? Probably not. But it is an option if you can’t find financing through another source and you are passionate getting your business off the ground.
So don’t count banks completely out of the startup game- you just might need to get a little creative and be a little persistent!
Other Sources
So I’ve just walked you through four sources of funding for your startup:
- Bootstrapping
- Credit Cards
- Friends & Family
- Traditional Banks
All of these are ways in which you can finance your business as you are just getting started, but this is by no means an exhaustive list! Make sure to download my free Startup Finance Guide (see below) for three additional sources of funding for startups (and I guarantee that you’ve never heard of one of these before!). So be sure to check out the Startup Finance Guide to learn more!