How To Get Money For Business Start-up

Where can you get money to start your business? That’s one of the biggest

challenges a startup business needs to address. These 12 start-up funding ideas

can help you get your business going.

Man searching with binocularsWhat’s the biggest obstacle to starting a

business? For most people, the answer is money. When you calculate your

startup costs and then add in the amount of money you need to cover your

personal expenses during the startup phase, getting enough money to start

your new business can seem like an impossible dream.

Nevertheless hundreds of thousands of individuals a year do find the money

to start a business. How do they do it? How do they find the money to get

started? Here are twelve solutio for financing the startup of your small

business. Some are nearly risk-free. Others involve significant financial risk

and should be used with caution.

1 – Start part-time. If you need a steady source of income to meet your

financial obligations (and keep your family covered by health insurance)

start the business as a part-time venture. Don’t quit the day job until the

part-time business has a steady flow of customers and profits.

2 – Start the business from home. You can start your business for much less

money if you don’t have to foot the bill for office space and utilities for an

out-of-the-home office. While you may not want to advertise the fact that

you work from home, you will have plenty of company. According to the US

Small Business Administration Office of Advocacy, 52 percent of businesses are

homebased.

3 – Get advance commitments for work. Line up one or two sources of business

before you take the plunge. Former employers, if you left on good terms, are

often a source of start-up work, or sometimes funding. Big companies that

can send you their overflow work or small jobs that they don’t want to do can

also provide the initial stream of work and income.

4 – Get a part-time job. Work part time and save up your earnings until you

have enough money to start the business. Or, as an alternative, work part- or

full-time in your own business and take a part-time job to supplement the

income from your new business .

5 – Live frugally – and invest the savings in your business. You don’t have to

live like a pauper or waste hours searching for 50 cent-off coupons to live

frugally. A few simple changes may save you $200 a month or more.

Depending how much coffee you drink, for instance, making it at home or in

the office instead of buying it at Starbucks or Dunkin Donuts could save you

$10 or $15 a week. Bringing your lunch to work instead of ordering it out

could save you another $15 or more a week. Eating a home-cooked meal

instead of bringing home fast foods or eating out on week nights could

possibly save you another $20 or $30 a week. Turning your thermostat down

a degree or two during the heating season, and turning it up a degree or two

when you have the air conditioning cranking away will save you significant

amounts of money during the year. If you’re determined to save money, you

can probably find a lot of other ways to cut back on your spending.

6 – Use a credit card. Using a credit card – if you have good credit – is the

easiest way to get money to start a business. Equipment, suppliers,

advertising and postage (for mailings) can all be purchased with a credit

card. And if your credit card gives you a line of credit, you can give yourself

an instant loan (up to your credit limit). But using a credit card to start your

business bears some significant risk, too. If you’re not careful you can quickly

run up a huge credit card bill – a bill you’ll be responsible for paying whether

your business is successful or not.

7 – Apply for a home equity line of credit. Some banks offer home equity

lines of credit that let you borrow up to as much as 75% of the appraised

value of your home. Depending on the value of your home and what you still

owe in other mortgages, that can put a significant chunk of money at your

disposal for starting your business. The downside: you’re putting your home at

risk. If the business fails and you can’t repay the loan, you could lose your

home. If you decide to go this route, be sure to read the Federal Reserve

Board’s information about home equity lines of credit.

8 – Apply for business loan instead of a home equity loan. Information you’ll

need to give the bank includes the: purpose of the loan, projected

opening-day balance sheet (new businesses), lease details, amount of

investment in the business by the owner(s), projections of income, expenses

and cash flow, signed personal financial statements and your resume. You

may also need a formal business plan. (If you’re trying to get funding to grow

a business you’ve already started, you’ll also need business financial

statements for the last three years, and information on receivables, payables,

and outstanding debt.) Don’t be surprised if the bank turns you down,

though. Banks are often leery of lending money to startups. For more

information on bank funding, see our articles about getting business loans.

9 – Ask Your Bank About an SBA-guaranteed loan If the bank turns you

down for a business loan, ask them if they’ll consider your loan through the

SBA guaranteed loan program. If they agree to do so, they’ll forward your

loan application and credit information to the nearest SBA district office, for a

decision.

10 – Borrow from family and friends. Family and friends are a frequent source

of funding for small businesses. But remember, you have to live with your

family for a long time – and you probably want to stay friends with your

friends. So don’t borrow from unless you have a business plan and have done

enough research to know there is a market for what you want to sell. Be sure

your plans provide a way to also pay interest on the money borrowed from

family and friends.

11 – Look for angel capital groups in your area if your business has the realistic

potential to grow to a significant size, (Your local SBDC or SCORE office may

be able to point you to a group in your area.) You’ll need a business plan

and be able to prove that you have the experience to run the business and

the business will make enough money to make the investors a nice profit on

their investment. Learn what angel and venture capitalist look for in our

section on finding investors.

12 – Consider applying for a loan through peer lending sites like Prosper.com

and Lendingclub.com

More

Use money from a regular job, part-time job, one-time gig, or contract work.

Generate cash from your business and re-invest it (also known as

bootstrapping).

Get a personal loan from family members or friends (iContact bought server

equipment through a loan from a friend).

Request a loan using Prosper.

Set up a credit line with corporate credit cards (iContact has 2 credit cards

with a combined $160,000 of credit available).

Use personal credit cards (I know someone who funded her business, a chain

of tanning salons, with credit cards.

She paid teaser rates only and kept track of when promotional offers ended,

and when she needed to find a new card.)

Borrow from your bank or credit union, getting a secured loan using your

personal assets (such as your home) as collateral.

Get a loan secured by business assets such as inventory, real estate, or

equipment.

Find a co-signer for a loan if you don’t have assets to use as collateral.

Get a bank loan backed or guaranteed by the Small Business Administration;

also see this article on SBA-backed loans from Business Week.

(iContact got a credit line from Bank of America backed by the SBA.)

Factor your accounts receivable; that is sell your unpaid invoices to a factor

who will pay you part of what you are owed now, and more when the full

amount is collected, less a fee, helping your cash to flow.

Structure a convertible debt deal. This Inc. article describes how a software

company owner designed a deal that paid its lenders a guaranteed interest

rate and then paid back the principal after 5 years if the debt had not been

converted to an ownership stake in the company. (iContact raised $500,000

by issuing convertible debt through a deal with NC IDEA).

Work with a venture bank such as Square 1 Bank or Silicon Valley Bank. These

banks may offer a variety of funding methods and tend to work with

companies that have strong potential for explosive growth and profitability.

(iContact has a $1 million credit line with Square 1 Bank).

Issue corporate bonds. A company may structure its own deal with a stated

interest rate and term length, and then sell the debt instrument to investors.
Find angel investors or a network of angel investors who will give you money

in exchange for a equity in your business (common stock or preferred stock).

Raise capital from a venture capital (VC) firm. This process requires much

dialogue and culminates in a term sheet or details of the agreement

prepared by the VC firm and a valuation of the company, which will

ultimately determine the percentage ownership the VC firm will have in your

business. (iContact received $5.35 million in funds from Updata Partners.)

Ryan recommends starting the getting-money process by preparing a business

plan and pro forma financial statements (projections of profit & loss

statements and cash flow). The financial information gives business owners,

lenders, and investors an idea of how much money is needed, what the

money will be used for, the projected return, and how much risk is involved.

The amount of money needed is a key factor in deciding the approach for

finding money: for example (according to a table in the book), if you’re

looking for $1,000 to $25,000, then you’ll likely get a bank loan or money

from friends; if you need $25,000 to $250,000, a bank loan or angel investors

are the way to go; if you need $250,000 to $1 million, go to a small VC firm or

a network of angel investors; for more than $1 million, see a VC firm. All of

these techniques require building solid relationships over a period of time and

being able to demonstrate that you know what you’re doing.

Note: I received Zero to One Million in exchange for a book review. This post

focuses on one chapter, “Raise Funding or Bootstrap.” Ryan shares general

business principles but also provides insight into what it takes to build a

high-value technology company. Fairly complex ideas, such as pre-money

valuations of companies seeking venture capital, are covered but the book is

easy to read and written in a conversational manner.

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