Funding Your Business 101

Startup Guides > Funding Your Business 101

Welcome to the startup guide to funding your business. This simple guide is for new entrepreneurs and individuals who believe that they have a great business idea and are considering going into business for themselves. This startup guide provides valuable information for funding your business through friends, family, crowdfunding, angels, banks, and venture capital.

First thing you need to know is that you are not alone. The shift from large companies to smaller companies is a trend that has been underway for many years, and the shift is due to many factors, including large company layoffs, veterans returning to the work force, people looking for a second income, and those just excited to provide a product or service that fills a need in the market. Being your own boss can be a rewarding experience.

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Ok, now the important part that our lawyers made us add: this overview is not meant to be a comprehensive exploration of all the various forms of raising money, and it is not intended to be legal advice in any way. We strongly encourage you to seek legal counsel to help you go through these choices in more detail. You are also strongly encouraged to consult a tax specialist, and the overview presented here is not meant to be tax advice.

So let's get started. The first question is, how much money do you need? While this sounds like a simple question, it is worth your time to really figure this out in as much detail as you can, not only determining how much you need now, but how much you will need in the near future. The amount of money that you need will have an affect on the sources of funding that you need to consider. Some of the questions that you should ask your self are:

1. Based on my type of business, is my need for business financing relatively small or large? For example, if you have a home based business that is you sitting at your computer doing creative work, you may not need much initial investment in your business to get started. On the other hand, if you want to open a new fishing boat business, your need for funds is large. You need to think through the requirement for funds based on the business you are building, and think about the funding needed now and to operate for the near future.

2. Will I need employees or equipment to launch my business? This would involve employee salaries, and equipment needed to run the business which could include trucks, moving equipment, catering and serving equipment, and many other possible needs. How much does it cost to buy, and should I buy it used, or should I buy it at all, maybe I should lease it or rent it.

3. Are there services I will need? For example, will I need legal help to run the business, having an attorney build contracts for example or will I need an accountant keeping track of my expenses and income and preparing tax records?

4. What about inventory for my business, how much do I need to buy and what are the terms of that purchase?

5. What about my utility bills, telephone, internet, and mailing costs? How about stationary and supplies?

6. Will I need to travel as a part of my business and what will that cost?

7. And do I need business insurance in case I get sick or am not available for a period of time?

While this is not an exhaustive list of expenses, I hope that you get the idea and explore all your costs in detail. Thinking about the obvious costs come quickly, but as you can see there are lots of less obvious costs that can affect your business. Put together your best estimates and determine your cost to startup and continue as an on-going business.

So now that you have a number in mind for what you need, the next step is to explore the possible sources of funding. There are two broad categories of funding that we will now talk about; personal funding and external funding.

Personal funding is the easiest to get, as it is the funds that you have on hand or can get quickly. Some examples of this personal funding would be from credit card advances or loans, home equity loans, and cash you have in your savings accounts. What are sources of cash that you have that you can get to easily...this is what personal funding is all about. Some things to consider are the risks you take in using these sources including higher interest rates on credit cards, changing terms by credit card companies, or defaults on home equity loans which could cause you to lose your house. Still these are the easiest to obtain and are in your control, and if you need small amounts of money, these can provide good sources of cash needed for your business.

For larger sources of capital, you may start to look at external funding, sources of funding outside of yourself and your personal means. External funding sources will include:

Friends and family crowdfunding
Angel investors
Bank loans
Venture capital

The first area to look at is friend and family money. Crowdfunding is the best method to get started in friends and family funding, and it basically means getting your business funded by those people that know you best. Your friends and family know who you are, they know your work ethic and your dedication to the business venture, and they share your excitement, and feel that you will succeed. Through crowdfunding, you might be able to receive funding in the form of gifts, contributions, or loans to your business. A credit score is not required in this form of funding, as your friends and family use their social and personal relationship with you to determine whether or not to fund you. Unlimited funding is available through this method, but the average entrepreneur will raise $10,000 or less from a few dozen friends and relatives.

Local investors or angels investors are another possible source of funding. In this instance you are taking on a lender who wants a return on his investment, and will work closely with you to help make sure that your business succeeds. While this lending is harder to obtain, contacts and relationships that this angel investor has may help you to succeed. is also a method of putting your business plan in front of these types of investors, and you'll find over 100 angel investors in the company listings.

You can also look at bank loans, where your credit history and legal form of the company will have a direct relationship on your ability to get a loan. Banks have a variety of loans such as expansion loans, inventory loans, accounts receivable loans, and financial/trade credit. Generally a bank will be more likely to lend to an existing business looking for expansion funding rather than a first time startup. They like to see assets of equipment for example, where if you fail to make payments back to the bank they can take your assets to sell at auction to recover their money. Small Business Administration loans (SBA) that you may have heard about are really guarantees that the SBA gives a bank to make you a loan if you qualify... this is a safety net for the bank if you don't repay the loan.

Venture capital companies, or VCs, are investment firms set up to provide capital to a business in exchange for ownership in that company. Typically a VC may invest from $1M to much higher amounts in exchange for a large percentage of ownership of your company. While this sounds attractive, in today's economy there are limited funds available for investment, and in many cases you must have a proven record of business startups to be considered. Investment by a VC typically has a 3 - 5 year window where they want to recover their investment with a substantial return. This often means that a VC wants to get back 5-10 times their investment in 3-5 years. As a result of this investment, they will want to be actively involved in the decisions affecting the business revenues and profits.

So we hope that we have helped you to better understand some typical sources of funding, and that you now have a better understanding of the advantages and disadvantages of each. Now, you might choose one source of funding early in your business, such as friends and family crowdfunding to get your business launched, and in later stages of your business you might be looking for a million dollars to expand, in which case you might choose another source such as a bank or venture capital. So consider your range of choices, and make the best decision for funding your business based on the stage of your business, the amount you need, and what makes sense for your particular situation.

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Funding Your Business 101