When you have an entrepreneurial mindset and you’re ready to build a business, it’s exhilarating. Unfortunately, one thing that might get in your way is funding. It takes money to start and grow a business.
With that in mind, the following is a guide to all the different ways you can fund a new business or at least some of the most commonly used funding methods.
Bootstrapping
Bootstrapping is a term referring to self-funding your business. You use only your existing resources. For example, if you have a vintage car sitting in your garage, maybe you sell it and use the cash to start your business. You might set up your office in that newly empty garage space and use just your personal computer as you’re getting started.
When you need inventory, you buy it yourself.
There are upsides to bootstrapping.
One of the biggest benefits of this self-funded approach is that as the owner, you retain complete control of your company. You don’t have to worry about what your business might look like with investors influencing it.
When you rely on your existing resources, you don’t have to take on debt and worry about whether or not you’ll be able to pay it back later.
When you bootstrap your business, since it’s your own money you’re using, you’re also going to be more careful about how you spend it. This sets you up for good habits in the future and helps you create a stronger business at the foundation.
So what about the downsides?
The primary downside of this particular approach is that your growth might be limited if you have more demand than what you can meet with the funding you have available.
For example, maybe you can’t grow because you’d need more inventory but you can’t afford it. You’re also taking on essentially all of the financial risk in this scenario as the owner.
If you are going to bootstrap, at least in the early days, remember the following tips:
- Don’t rent a space until absolutely necessary. Even when you do think you’re ready to get a space, such as when you hire an employee, look for something like a cheaper co-working space.
- Don’t buy things like new office furniture and equipment. Buy it used because there’s no benefit to getting the newest or nicest of these things at first.
- Conserve your cash by negotiating everything to get what you need.
- Some suppliers will provide discounts if you pay early, so make sure you’re organized and pay those first.
Small Business Loans
There are different types of small business loans available, but all are fundamentally the same in that they help you start or grow your business.
Some of the types of small business loans include:
- Business line of credit: A business line of credit is ideal if you want flexibility. These types of loans range from $1000 up to hundreds of thousands of dollars, and they’re often available within a week. Rates can be high, but they’re revolving. That means you don’t get a lump sum, but you access money as you need. When you pay off what you’ve used, then you can access it again. The money is there, but there’s no requirement to use it. As part of applying for a business line of credit, you may be asked to sign a personal guarantee. A personal guarantee means the lender could seizure your personal assets if you don’t pay.
- SBA Loans: The Small Business Administration has a lot of valuable resources for entrepreneurs. The SBA works to help small businesses, especially those that might otherwise not have access to funding or other resources. SBA loans range from $50,000 up to millions of dollars. The SBA isn’t actually the lender; but instead, they guarantee a portion of the loan through financial institutions. The downside of SBA loans is that the approval process can be tedious and it can take a while to get funding. There are different types of SBA loans including the popular SBA 7(a) loan and the SBA Express Loan.
- Business term loan: This type of business financing is a useful way to access working capital, buy equipment or hire employees. Loan amounts vary significantly, and the funding process tends to be fast. Repayment terms are usually between one and five years, and interest rates are often reasonable.
- Business credit cards: Eventually, you will likely have at least one business credit card. Business credit cards are easy to apply for and use. If you don’t want a loan or maybe don’t qualify, a business card could be something to consider. The advantage of a credit card, in addition to access to funding, is that you can use it to build your business credit.
- Startup loans: Some financial institutions offer loans specific to startups. They give you the initial capital you need, and terms may be as long as 25 years.
To get approved for different types of business financing, lenders will look at the following factors:
- Personal credit: Even though you’re applying for business credit, it’s nearly certain lenders are going to want to look at your personal credit. Business and personal credit are interwoven with one another.
- Personal debt: A lender is going to want to see what your current debt levels are and how well you’re able to manage those, plus how taking on additional debt even in a business capacity could affect that.
- Business debt: Lenders will also want to see your business debt coverage and whether or not you’re equipped to handle your debt obligations.
- Business revenue trends: Lenders will be more likely to extend financing if they can see that your business is trending in the right direction.
If you’re truly a startup, you may not have any business credit history or revenue trends to show. In this case, your personal credit history and financial factors will weigh more heavily in the lending decision.
When you’re looking for business financing, there are traditional lenders, and another option is to go with an online lender. If you don’t have a lot of time in business and maybe your credit score isn’t perfect, online lenders may be more willing to work with you than a traditional financing institution.
Grants
Grants are often called free money, provided by state and federal agencies and private companies and organizations.
Small business grants help startups and also existing businesses. Some are specific to certain demographics, and others may be related to COVID or particular industries.
If you can secure a grant, it’s a big win for your business because you don’t have to pay the money back.
The issues with grants are that it takes a lot of time to find, research and apply for these opportunities. They’re limited and often have stringent application requirements. You may also have to meet ongoing requirements as you use the funds.
Grants offered by private companies may be open to more people and be more general than government grants.
Investors
When you’re a business owner, accepting a check from an investor can seem like you’ve won the lottery. The reality is that while it is one funding option, it’s something you have to be careful with.
Things to watch for and consider include:
- What’s the structure of the investment? There are a lot of ways investors can put money into your business, and the route an investor wants to take can drastically change what you agree to and the future implications. For example, there are equity investors and debt security investors. Equity investors only get paid if you make a profit. On the other hand, you have to pay back a debt security investor no matter your financial status.
- If you’re going to offer equity to someone to invest in your company, this gets complex in terms of setup and takes away some of your control. You have to decide whether you’ll offer preferred or common shares. If an investor gets common shares, then you’re equal in terms of decision-making. If your investor gets preferred shares, they will get more control than you and potentially take a bigger share of the revenue.
- Most investment agreements have an anti-dilution protection clause, which means that if you were to take on investors in the future, you’d have to defer to this clause.
If you are considering funding from investors, you need to be careful to read the fine print of your agreement. Don’t be so anxious to get the money that you make a decision that will ultimately be bad for you and your business.
Finally, there are, of course, other ways to get funding, if you prefer. Crowdfunding is one option, or you can go to friends and family for a loan.
What often ends up happening is that entrepreneurs get funding from a variety of sources. You might bootstrap some of your business and then apply for financing when you’re ready to grow, for example.
