Thinking of starting a business? Then you have likely wondered how you will raise the money to get going.
The good news is that most entrepreneurs have faced this challenge – you are not alone. The difficult task that lies ahead is obtaining enough money to start and maintain your business before making a dollar from your revenue.
Starting a business is not only emotionally difficult – it takes scratch. Unless you have a hefty sum of cash stored away, a rich uncle, or can stomach incurring massive personal debt, you will need capital (startup money that finances your business). The solution? Outsource your capital needs through a list of credible options.
Determine Your Initial Costs and Financing Options
While outsourcing has its critics, it can be a sustainable source of capital. Obtaining sufficient capital is the most important factor when starting a business – that is, if you want it to be a successful, long-lasting one.
When outsourcing for capital funds, you need to know exactly how much to borrow. Many failed businesses share the common mistake of undercapitalizing their businesses. In other words, they didn’t take out enough money to both starts and run their business until hitting a break-even point (when sales revenue equals total expenses). You need to gather enough money to set up shop, as well as keep the lights running until your break-even point is reached.
So how much capital will you need? Start by asking these questions:
• How much money do you need to start your business?
• Do you already have money saved up for your business?
• Do you currently own assets for your business (and any assets that can be used as collateral)?
• Are there people (family, friends, strangers) or organizations willing to invest in your business?
• What does your credit score look like?
Many startup owners inherit a mass of personal debt to turn a passion into a reality. Some might frown at the prospect of taking on more debt to outsource critical business operations. Yet the value of outsourcing operations, and therefore concerns, far outweigh the initial cost.
Our economy is challenging. Searching for startup money is even more challenging.
The Top 8 Financing and Outsourcing Options
Here are the top eight financing and outsourcing options to help your startup business quickly launch:
1. Personal Savings
Personal savings should be your first source of start-up funding. Generally speaking, 25% to 50% of your startup costs should come from your personal savings. Start saving now to see real benefits later.
Fronting this money yourself will help banks or other prospective lenders see your willingness to embrace risk and your commitment to success. As you continue your business, a rule of thumb is to personally invest at least 25%. Banks like to see equity, or ownership, of your company.
2. Government Funds
Federal, state, and local governments offer financing opportunities for businesses, particularly small-sized businesses. Here are two types of governmental assistance out there:
• Grants. The attractive quality of government grants: low-interest loans, scientific and economic development grants, and venture capital. You may qualify for a government grant if you classify it in a particular category or demographic.
• Loans. There are a variety of loan programs available through the U.S. Small Business Administration. This is where most government funds are found. Unlike grants, loans must be repaid plus interest.
Each grant or loan comes with its own criteria and qualifications, so make sure to read all the paperwork to see if your business qualifies.
3. Commercial (Bank) Loans
Commercial loans from financial institutions account for about 44% of financing. Here are the two types of bank loans:
• Long-term loans. Long-term loans are used for big expenses and fixed assets – think assets that you plan to use for more than one year. These loans are generally secured with some form of collateral.
• Short-term loans. Short-term loans are for small expenses and daily expenses – think assets that you plan to use for less than a year.
Examples are credit cards and credit lines. Credit cards can be a viable option when used wisely to finance your business. They can be a great benefit to pay for current expenses that you don’t have the currently don’t have the cash for. Exercise caution when using a credit card, however, and stay on top of payments – or else your credit score will be negatively affected.
Financial institutions look for the “4 C’s” when reviewing your loan application:
• Cash flow. Do you repay the cash you are borrowing?
• Collateral. What is the asset value you pledge to insure your loan repayment?
• Commitment. How much money are you willing to personally put down on your business?
• Character. Do you have a good credit score?
In addition to the 4 C’s, there are other ways to make a good impression and increase your loan approval chances:
• Make sure your management is strong
• Have steady business growth
• Have proven future cash flow
• Provide collateral
• Boost your credit score as high as possible
• Never miss a loan payment and always be on time
Maybe a commercial loan isn’t in the cards because you don’t have a credit history or you can’t receive a loan through a banking institution. There is still hope for your loan needs with a microloan. With several hundred in the US, a microlender can give you a smaller loan, ranging from $500 – $35,000, with greater flexibility than a bank.
Crowdfunding involves people (family, friends, strangers) donating money online to your cause or goal. One example is Kickstarter.
You set the money goal with a deadline and others help you out by adding money. This is a good choice for one time projects, but not long-term, continuous cash flow. Over 100,000 people have donated to Kickstarter projects. Other crowdfunding sources include Indiegogo, Crowdfunder, and GoFundMe.
Your retirement funds are another potential source of financing a business. However, keep in mind that it comes with risks – if your business fails, then you may lose a significant portion of your retirement. Therefore, if you do use your 401(k), or similar retirement funds, do so as part of a larger, diverse set of financing arrangements.
Factoring is when a business sells its receivables at a discounted price to get upfront cash. Businesses that tend to use this method are apparel manufacturers since they must satisfy clients’ orders prior to receiving payment. Be aware that this is an expensive way to secure money. Interest rates are high and fees are steep.
8. Loans From Family and Friends
Asking to borrow money from family and friends is a source of income that does come with heavy caution. Obtaining a loan from a close loved one can strain the relationship and risk his or her financial future.
Suggestions for going this route include:
• Having a concrete business plan before talking
• Choosing a time to talk when there are no distractions
• Offering a specific business plan
• Providing an evidence-based plan that determines when they will have reimbursement
Keep in mind that the family member or friend may want to come on board as a partner or with some monetary benefit down the road, so plan ahead for the answer to that, especially if you’re more interested in going solo.