Starting a business is a life decision that involves many moving parts. Not only do you need to come up with a business idea, but you also need to develop a business plan and put some thought into where you can get enough capital to get your idea off the ground. Without going into debt, of course.
Best case scenario, your business will be one that doesn't require a significant amount of initial investment to get up and running. And maybe you can use bootstrap budgeting in the beginning to make your funds stretch further. But where does that initial influx of capital come from? Here are a few ideas you may want to consider.
Funding Source: You
One option you have for your startup is self-financing, which means you're providing your own capital to launch your business, usually by risking your 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.
Funding Source: Family and Friends
Family and friends can be a low-cost and relatively easy source for financing a new business. You can even consider trying to get financial support from family and friends, combined with options like crowdfunding.
Make sure you use a written agreement when money is changing hands, especially with family. This will help protect both parties financially, and can limit the amount of damage caused to the relationship if the startup were to fail.
Funding Source: Bank Loans
Bank loans can be a good way to finance a startup, if you're able to get one. 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.
Funding Source: Investors
While most of us would love to start our businesses with robust coffers and the support of more experienced entrepreneurs, finding investors can be even more challenging than getting a loan.
In general, 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.
There are other financing options, such as using vendors or customers who are paying up front to fund future operations, or finding a small business grant. The key to finding money for your new business is to take time to research your options. And keep in mind you can also combine two or three different options to raise capital.
As you explore your options, 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.