Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
In an article about financing a startup, CEO of Startup Professionals Mark Zwilling, stated, “The most successful entrepreneurs are the ones who think creatively, not only about their offering, but also about how to acquire cash, and never say never. They have to sell themselves, more than their product, to close on every alternative source of funding.”
Truer words have rarely been said.
If you’re ready to see your dream become a reality, then it’s time to start assembling the funding to back your idea.
There are multiple sources for funding, some of which you may already have considered and others which perhaps have yet to cross your mind. In this article, we’ll cover some different ideas for funding your endeavor.
Not every funding avenue is appropriate for every business – or every entrepreneur. You may feel more comfortable with one avenue over another and that’s okay. The two most important points to bear in mind are: 1) to fully understand the risks implicit with each particular sort of funding; and 2) to appreciate all of the lender obligations incurred by each option. The more complete your understanding of the possibilities, the more able you are to take only calculated risks.
As I cover several of these different funding sources, I’ll note some of the risks associated with each so you can make a more informed decision when it’s time to start seeking financing for your new venture.
The first thing that probably comes to mind when considering funding options is investors. Shark Tank has certainly helped to popularize the idea of scoring financial investment from venture capitalists and angel investors. Combined with the stories of successful investors who picked the right companies at the right time (as well as the hard-luck tales of those who failed to get on board early), it’s no surprise that many entrepreneurs consider seeking outside investors to be a viable avenue of soliciting funding.
Is it, though?
For most companies, the answer is ‘no’. At least not on the scale of Silicon Valley investors where some startups are given millions of dollars to focus on their websites, apps, or products.
For small businesses, it’s far more common to receive investment funding from friends, partners, and families.
Having investors means that you have to answer to someone. Most investors do so because they expect returns. They generally know the risks, but they’re betting on success. Seeking outside investment is best for startups that are comfortable with allowing those investors to be involved, to varying degrees, in the process of running the business. Additionally, don’t fail to consider that, if your investors are friends or family members, your personal relationship may permanently change or suffer as a consequence of their involvement.
Local Development Programs
One underutilized method of financing is local development programs. The SBA’s state directory for economic development agencies provides a great starting point for anyone looking to launch a business. Not only can it help you find local resources for networking and licensing, but different agencies may also have information about tax reduction and funding.
The risk of utilizing any particular program will vary. While loan programs will invariably carry interest and repayment terms, other programs such as tax credits for starting a business in an economic development zone will carry little to no risk. Not all states or counties will offer financial funding, but they may help to defray costs.
Hitting Up the Bank
Chances are you’ve heard of the Small Business Association (SBA), but are you familiar with their resources and how they can help you? Whereas most loans geared toward small businesses focus on growth, an SBA loan can help you start your enterprise. In addition to loans and grants, the SBA provides plenty of other useful information to help get your business up and running.
The SBA itself does not issue loans. Rather, they’re sourced from an SBA-approved lender. As with any loan, you’ll be expected to repay the principal plus interest. You may also have to submit collateral. Generally, the interest on an SBA loan is less than that on a credit card, but it may vary based on your lender.
Another option popular with small business owners is credit cards. Applying for a credit card can be simpler than applying for a loan or attempting to entice investors with your novel idea. For some people, this is one of their primary options.
Credit cards can carry high fees and interest rates. While some defer interest for a year, others start accruing immediately. Be sure to ascertain the terms of any card you decide to use.
For homeowners looking to start a business, their properties are generally their largest asset. Refinancing a home can provide entrepreneurs with starting capital by borrowing against their real estate.
When you refinance a home to start a business, you may be able to lock in a lower interest rate, effectively lowering your monthly mortgage payment. However, you’re also extending the length of your mortgage by effectively starting over with a new loan.
Digging in Your Own Pockets
Also known as bootstrapping, funding your own business can be difficult and risky, but it also shows future partners or investors that you “have skin in the game.”
Investing your savings or your 401k into a business can deplete your accounts, leaving you with little to fall back on should your business fail. It’s a high risk funding option, but it also shows others how much you believe in your idea. Some business owners choose to bootstrap in order to control as much of the business as possible during the initial growth phase, then plan to seek investors later after having proven the viability of their business model.
Calling All Friends (and Friends of Friends)
The Internet has made funding certain businesses a bit easier. While the structure of crowdsourcing platforms varies, the idea is the same. Innovators create a campaign that they then share with family and friends and on their social media accounts. Viewers can choose to commit a certain amount of funding, which is generally tied to a series of graduated reward levels. Requirements for a campaign vary, as do fees. Some platforms only provide funds when a campaign is fully funded (Kickstarter), while others, such as Indiegogo and GoFundMe, allow campaigns to keep all contributions regardless of whether they meet their stated goal.
All crowdsourcing platforms charge a fee (or several), so be sure to read the fine print. As previously mentioned, different platforms have different requirements. For example, for a Kickstarter campaign, there must be some sort of finished product. It wouldn’t be suitable for starting a green carpet cleaning business, but Indiegogo might be an option.
You Are the Deciding Factor
There is no single best way to finance a business endeavor. There is only a ‘right’ way for you. Depending on the level of risk you’re willing to accept, you can better determine which financing avenues to pursue.
As entrepreneurs, we know that there’s no one way to do anything. The same goes for funding. The limits of financing are as vast as your imagination.
It may be difficult, but perseverance is important. Make use of all resources close to you; if you keep hearing “no”, it may be time to consider revising your business model or to reassess other avenues of funding.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.