Fund your Business
Now that you have drafted your business plan, it's time to determine how to fund your business. The old saying, “It takes money to make money” is often true. Unfortunately, many business owners start a business taking on debt or using savings. You are often your first investor, but it is important to seek out other sources of funding for the sake of your financial security and sanity.
Types of Funding
Bootstrapping
A common practice among new business owners is to reinvest profits earned into the business. This approach, known as bootstrapping, seems rooted in common sense and is the first phase for many businesses. Bootstrapping can be very restrictive for business’ growth. Businesses often need large infusions of capital (i.e., buying a fancy bread making machine, purchasing a car, etc.) that could take months or years for the owner to develop on their own. There are a variety of innovative business strategies and tactics that you can use to move beyond bootstrapping your business.
If you need outside capital, there are four broad types of funding sources to think about as you evaluate funding options: personal, traditional, alternative, and online.
Personal
Many new entrepreneurs must fund their businesses from their own pockets or personal relationships for the first few years out of necessity. While those options keep you in control, you also take on all of the risk. It’s advisable to set aside a monthly budget for your first few years until your business breaks even. You can further avoid risking your financial future by considering some of the options below.
Traditional Lending Institutions
Banks and Credit Unions
Traditionally, entrepreneurs have reached out to banks and credit unions to receive start-up capital to help fund their business. You may need to apply for a small business loan from your bank or local credit union. Most lenders require a detailed business plan, strong personal or business credit scores, and a personal guarantee or collateral.
Mission-Driven Lenders
Mission-driven lenders, including community development financial institutions (CDFIs), work with entrepreneurs who may struggle to access traditional bank loans. These institutions often provide additional mentoring and support to help you improve your application and continue working with you through the life of your loan.
Government Support
Federal Government
SBA-Guaranteed Loans
Because banks are often wary of lending to new businesses, the Small Business Administration (SBA) works with lenders to guarantee loans for entrepreneurs. The SBA isn’t a direct lender, but instead works with other community lenders to increase access to capital for small business owners by reducing the risk involved. Check out the full list of SBA-approved lenders here.
State and Local Governments
Some states and cities have grants and loans for entrepreneurs who live in their city. For reference, we would recommend checking what your state offers in this guide.
Alternative Funding Sources
Microlenders
You might only need a small amount of money to get your business started or take it to the next level. Microlenders specialize in providing small, short-term loans with relatively low-interest rates. These loans range in size from a few thousand to fifty thousand dollars and are intended to be for aspiring entrepreneurs who would not be eligible for a traditional business loan. While many traditional lenders may give out smaller sized loans, some lenders specialize in these types of loans. The SBA has a dedicated microloan program that provides funding to specialized lenders across the country.
Equity Crowdfunding
Equity crowdfunding involves selling small shares of your company to a large number of people to fund your business, typically through a small dollar amount. Businesses can raise up to $5 million over 12 months with equity crowdfunding.
This type of crowdfunding is different than reward crowdfunding which investors often receive a small gift like branded merchandise rather than equity or financial return. Common reward crowdfunding sites include Kickstarter, Indiegogo, and Crowdfunder.
Online Lenders
Online lenders continue to grow in popularity. They take the form of private companies (i.e., Square and PayPal) that lend as part of a larger business offering or as entities wholly designed for online lending. Most financial institutions, including traditional banks, SBA-backed lenders, CDFIs, and others now offer online options with faster and more convenient application processes. BE CAREFUL. Many online lenders offer riskier terms, like higher interest rates or high penalties and fees. Make sure to educate yourself on the repayment terms before taking any online loans.
Tips When Talking to Funders
Talking to funders can often be an overwhelming and stressful process, as you feel the future of your business is on the line. When you talk to potential funders, whether at a bank or in your home, we encourage you to follow these tips.
Master your elevator pitch - Be sure to have your elevator pitch for your business down cold. It should only take a minute to describe your business and its mission. We recommend workshopping this pitch with a mentor beforehand.
Clearly state your objectives and success indicators - Funders want to know what your measure of success is and how you plan to achieve it. Be sure to be organized and outline your objectives and success indicators when you are talking to funders.
Be patient and persistent - Rarely are you able to close the deal with a potential funder during your first meeting. Be sure to follow-up with a written “thank you” note and be patient. Sometimes the conversations you have today plant the seeds for funding in the future.
Essential Items for your Funder Presentation
While all types of funding will have different application processes and requirements, it is a good idea to make sure you have the following items organized before starting the financing process:
- Business plan
- Financial statements
- Business registration or license
- Personal and business tax returns
- Financial documents, such as cash flow projections or a balance sheet
- Proof of collateral
The process of funding your business is continuous and often includes multiple sources. Be on the lookout for new opportunities and have the courage to put yourself out there. Unfortunately, you also need to be on the lookout for scams. If you think an offer is too good to be true, be sure to reference this page from the Consumer Financial Protection Bureau on how to recognize the warning signs of scams and recent alerts. One of the most important questions that funders ask is about your business structure. Check out the next page to learn more about structuring your business and taxes.
