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The 22 Known Ways to Finance a Start-up

I was approached by a father and his teen-aged son while hosting a small business exposition some years ago.  The father asked me who to talk to at the exposition to get the $100,000 his son needed to start a business based on his son's "sure-fire idea."  Far too many prospective entrepreneurs assume this is how you fund a business: Go ask someone for a wad of cash and within a short period of time, we'll be rich.

Here is a breakdown on the 22 Known Ways to Finance a start-up.

1.      Take a very sharp pencil to your personal budget and your business start-up and operating budgets.

Your primary personal source of financing for your business is yourself.  If you try to get a bank or investment company, or even private investors to underwrite your business, and you haven’t put your own money in, how do you think these people will react?  Working with other people’s money is an accepted business practice -- as long as you are sharing in the risk, too.  To start the process, start by looking for:

a.      Savings on your household budget.

Starting a small business almost always requires that you and your family accept a cut in your standard of living now with the expectation that you can return to your current standard -- or a better one -- later.  The money you save by cutting back on vacations, buying less expensive goods, selling the third car, taking your lunch instead of eating out each day -- this can add up to a substantial savings.  This is money you can use to invest in your business.  Conversely, the less you spend to run your household during the start-up period, the less pressure and stress you will feel.

The important thing is to talk through what you are doing with your spouse or partner so they understand the sacrifices that must be made to achieve your dream.  If your spouse or partner is not willing to accept a lesser lifestyle while you establish and build your business, you have a problem that will put unimaginable stress on you and your relationship.

In addition to cuts in your household budget, there are other sources of financing available to you on the home front -- money that can go into the business or be used to support your household while getting your enterprise up and generating an income.

b.      Savings on your start-up budget.

Your start-up budget is another source of capital, as it the less you spend to get started, the more you have available to run the business until the business is generating an income.  Many if not most start-up start-up budgets I've reviewed include unnecessary items.  It would be nice to have a mahogony desk and ergonomic chair, but you really don't need that now.  There's always the kitchen table and a chair.  So take each seperate item on your start up budget and ask yourself, "What is the least expensive option for this?  Do I need it?  Can I purchase used or find it for free?"  Every cent saved here lowers your start up costs, and is a form of financing.  

c.       Savings on your operational budget. 

The same thinking applies here.  If having an assistant is an absolute must, what is the least expensive way to hire one?  Remember that wage or salary cost includes social security taxes and other benefit costs you must pay.  Plus there is liability insurance and workman's compensation, plus equipment, workspace, and the cost of bookkeeping and processing wages and salaries.  The single largest operating expense in a business is employee cost.  Again, every cent saved here is available to get your business started. 

2.      Dip into your personal savings and or investments. 

The return on a successful small business can be much better than the best interest rate you can earn in a savings account, and even better than that available through most stock investments, mutual funds, and so on.  Look at your investment in your business as a true investment, and compare what you could gain from investing in your own business as opposed to investing in stocks or bonds.  Take reasonable risks, expect reasonable returns.

3.      Borrow against personal assets.

Take out a second mortgage or refinancing your home, refinancing a vacation property, and so on.  However, if your business fails, these personal assets will be at risk and you could lose them.

4.      Signature loans. 

If your credit is really good, you may be able to arrange a signature loan.

5.      Existing credit accounts and cards. 

This is a surprisingly common source of investment capital for many small ventures.  Famous Amos financed his original cookie empire in part on his personal plastic.  Film maker Spike Lee is reported to have funded his first movie on his cards.  Many small business owners live on their cards during the early days of their business, or use their cards to get through lean times.  And all businesses have lean times.

6.      Sell personal assets

If you own a boat or vacation home or other personal asset, especially if that asset is free and clear, and you’re not willing to sell it to start the business of your dream, then how committed are you to this course of action?  If the business is successful, you can always reward yourself with a bigger boat or nicer vacation home, right?  It’s all part of the risk of starting a business.

7.      Consider tapping into your retirement funds. 

This one makes me nervous, but that’s a personal issue.  Your retirement is your safety net for your old age.  Without it, you would have to rely on Social Security alone, and that isn’t much of a lifestyle to look forward to.  Taking retirement funds out often means paying substantial tax penalties, too.  Myself, I wouldn’t do this unless absolutely necessary. 

Again, remember that starting a business should be a reasonable risk.  Just as you wouldn’t mortgage your home to make a 35:1 bet in Las Vegas, don’t take unreasonable risks with your financial security.  You have to achieve the balance of committing your resources to making the business happen and grow and become successful, but balanced with a sense of responsibility to yourself and your family in later years.

8.      Keep your full-time job.

I was surprised at how many entrepreneurs with very successful businesses, started their business while working their full-time job.  This is a very common strategy.  A survey conducted by Inc. Magazine reported that it is common for the owner of a new small business to work both their full time job and their new business from six months to a year before the entrepreneur resigns to run his or her business full time.  To be successful, you do what you have to do.

9.      Work part-time. 

Often a part-time job on the side is all that is needed to keep the home fires burning while you build a business to the point that it generates a regular take home income.  A regular dependable income, small though it might be, can take a lot of the stress out of the start-up period of your business.   If your spouse or Housemate isn’t working, ask them to get a full or part-time job at least during the start-up period of your business.

10.  Take an early retirement and draw retirement pay. 

A growing option, especially as we baby boomers age.  Research has also shown that people who retire without some activity to move on to have a much shorter retirement.  Many mid-sized and large business offer early retirement options, especially during times of “down-sizing.”  Consider this as an option that can be very fulfilling, fun and profitable. 

11.  Negotiate to receive trust funds or an inheritance early. 

This is first cousin to borrowing money from family, something that can cause great disruption and bad feelings in the best of families.  Still, it is an option. 

Those are the inside sources of capital to start your business.  Before we examine the outside sources, take a moment to understand how to work with outside sources of capital.  It should save you a lot of worry and frustration.

Working with Outside Funding Sources

There are quite a few outside financing sources you can turn to, but your chances of funding a start-up with other people's money are pretty slim, really.  The risks in a start-up run by an untried owner and manager are pretty high in the eyes or bankers and other financial professionals.  Remember, these people are in the business of making money for their employers or investors or for themselves, not funding every “great” business idea that comes down the pike.

To give yourself the best chance to get financing from outside sources, follow these steps and recommendations.
  1. Have a reasonable business plan, well researched and documented.
  2. Make sure you have cut every unnecessary item and ounce of fat out of your business budgets before you go in. 
  3. Demonstrate that you are investing your own money in the business.
  4. Demonstrate that your business can survive and make a profit without their money.
  5. Have reasonable expectations, persistence and patience.  Understand that 99 times out of one hundred you are going to have to self-finance your way through the start-up period of your business, and be showing a profit or at least measurable progress toward a profit for three or so years.  Most financial professionals will want to see your records from three to five years of business operation before they will seriously consider lending you money.
Sorry.  Them’s the facts.  And before you go any further, read the following:

Understanding "Credit Scoring"

Financial institutions use a system called credit scoring to determine which businesses to extend credit to either as an outright loan or as a line of operating credit.  In general , they will require:

The optimal small business credit score is based on:
Owners with a good personal credit history, even if the business is any form of corporation.  It is common to require the owners of corporations to sign personal guarantees on loans and lines of credit to their businesses.
  1. Ten years personal experience in your industry.  Industry experience in an industry is a critical success factor.  It means you understand the industry and the way things are done.
  2. Three years in business for yourself, with complete financial reports and a record of growth and profitability or strong progress toward profitability.
  3. A debt to equity ratio no greater than 2:1.  In other words, you own twice as much as  you owe, so in case the business goes under, there is something the lender can go after.
  4. Fewer than 6 requests for a credit report in the last 6 months.  The more you shop around for financing, the more it looks to financing professionals that you are either desperate or ill-prepared when you submit your loan applications.
  5. Have maintained an average monthly business checking account balance of 10% to 20% of the amount of your loan request.  If you’re asking for $1,000,000, then you should maintain a monthly business checking account balance of between $100,000 and $200,000.
  6. Present a well researched and prepared business plan.  This is something that you have to sell, because you are asking that the loan officers and lending committees of the financial institution believe that you know what you are.
I know that Credit Scoring sounds like a Catch 22.  That’s because it is a Catch 22.  To start a business you must have been in business – with some level of success – for at least three years.  And its corollary, to get a loan you shouldn’t need loan.  No, you’re not losing your mind.  These are the standards.  But that doesn’t mean you shouldn’t try.  Just go into starting a business with your eyes open.  It doesn’t hurt to have a sense of humor so you can laugh rather than cry or rant or rage.

Outside sources of capital.

12.  Loans from friends and family. 

This is risky -- the risk being the loss of the friendship or the family relationship if your business doesn’t work out and you lose their money.  Friends and relatives may tell you, and even honestly believe, that if you lose their money they won’t mind, but trust me, it will cause a serious problem that will last until you pay the money back with interest.  If you choose this financing route, fine, but keep the risks in mind.

13.  Sell equity in your business to friends & family. 

Family businesses are very common, and in fact, several major university business schools operate family-business research and training centers.  A friend of mine is the fourth or fifth generation owner of a successful hardware business here in Portland, and the business is well over 100 years old.  A high-school friend started working at the photography store owned by his parents after returning from the service, and has worked happily with them for nearly thirty years now.   There is something special about family businesses when they work out for everyone involved.

There is also something very destructive to families and extended families when things go wrong or personality conflicts arise.  What happens if cousin X mismanages the business, and everyone loses their money?  What happens if brother B has to fire sister S for incompetence?  What happens when the children of the founder just aren’t the sharpest knives in the drawer and the business falls apart after the retirement of the founder?

There is a lot to consider here, both pro and con.  If you are setting up a business with family, or if family is going to invest in your business, do your homework and contact a family business center to advise and assistance.

14.  If a franchise, what resources does the franchiser offer? 

It’s not uncommon for franchisers to offer some financing assistance.  After all, just like car dealership, they only make money selling you the franchise, and then collecting the various royalties and fees involved.  This can be good source, though not complete source of financing.  They are still going to want to see you invest a pretty healthy chunk of cash in the business, too.

15.  Approach a commercial bank 

Just like any service, you should shop for a bank before selecting one.  Make an appointment to meet with an experienced commercial banker.  Show them your business plan, talk about your ideas, plans and needs.  You just never know what they might say.  They may even invite you to submit a loan application -- stranger things have happened.  Just meet with them first, before you run around willy-nilly submitting loan applications to every financial institution in town.
A fairly new source of funds are micro-financing companies and organizations.  These organizations make loans of much smaller amounts that will a commercial bank.  For example, the founder of the Sam Adams brewery funds a micro-financing organization.  Do a search on the net for micro-financing active in your area.
16.  Apply for an SBA Guaranteed Loan 
The Small Business Administration is an excellent source of information all aspects of a starting a business, and offers quite a bit of financing through loan and loan guarantee program.  Make it part of your pre-start-up research to meet with a representative of the SBA to discuss your business and see what services the SBA may be able to provide.

17.  Research and apply for Government funding and loans. 

Yes, money is available from a variety of government agencies that could be used to help you start your small business.   Local and state governments have a vested interest as well as a political mandate to stimulate your local economy.  Often, these government agencies actually have cash set aside that can be used by start-ups.  There is no single source of this information, so get on your telephone, and start calling your local government offices, right on up to the state and federal level.  Try departments of economic development, commerce departments, and so on.  Ask if they offer assistance, or if they know who does.

Another agency to contact for information about these programs is your local Chamber of Commerce.  Since each is locally controlled and funded by membership dues, the range of services available in individual communities can differ quite a bit.  Call, and as what small business services they sponsor, and ask if they have a small business advisory or assistance program, or if they know of one.

18.  Find an "Angel" 

An Angel in business is someone who puts money into your business usually in exchange for an ownership interest now and a right to gain more ownership later.  There are people in many communities who do this for a living.  Understand, though, their motivation is to make money on their investment.  The up side is that they are usually pretty savvy and can be of great assistance both financially and with advise.  The down side is that there are very few of these people, and they are deluged with requests for financing, meaning they can and do pick and choose.

The risk of working with an angel is that they want ownership, and sometimes even a major say in how you operate your business.  It’s not unknown for Angels to actually oust the founder and owner once they have financial control and take day-to-day control of the business.

To find an Angel talk with your attorney, accountant, banker and others in your community to see if anyone knows who does this. In many states and communities there are events sponsored where entrepreneurs like you compete for the attention and investments of Angels.  And this can be very competitive so you must go in prepared.

As always, if you work with an Angel, even if it’s your brother, father-in-law or next door neighbor, work with an attorney who represents you and only you to draw up and/or review your working agreement in the form of a notarized contract.

19.  Apply for non-profit or foundation grants. 

There are many private, non-profit foundations around that assist small businesses with grants.  While these rarely offer out-right start-up grants, if your business has a social service aspect to it, or you can demonstrate a community good, you may be able to obtain a grant.  Again, ask your attorney, CPA and banker about this, and make a few telephone calls.  Be prepared to write up a grant proposal, and have to wait some months while your proposal goes through the approval process.

20.  Small Business Investment Companies or Venture Capital Firms

These firms are Angels -- firms set up to lend and invest money in start-up businesses.  In fact, some of these were start-ups themselves not all that long ago.  Their business is to make money for their owners and investors by investing in other small businesses.  Most of these folks are quite sharp and savvy, and have a lot of experience culling the wheat from the chaff, finding those small businesses with the best potential.  Bear in mind, though, that these companies will probably want an ownership interest in your business, plus a say in how you run your business -- which can be either good thing or a bad thing.  Again, make sure your attorney reviews any contract or agreement drawn up before you sign it.

21.  Find a Corporate Partner         

This can be quite an interesting approach to financing, and quite fruitful.  In fact, Jeannie started her graphic business with the support of a corporate partner.  Even though they didn’t put any cash into her business, they did promise to use her services once she got her business up and running.  This is a common way to “finance” a business.

Corporate partners need their outside suppliers, and if you are going to be supplying something they really need, perhaps they can help you with an investment or with unused equipment from their inventory.  Even if you don’t have a relationship with a prospective corporate partner, is doesn’t hurt to approach them, business plan in hand, to see in which way, if any, they can help you.

22.  Go Public. 

This is rarely an option for a start-up company.  The usual course of financing for start-up companies is private financing to get started (out of the owner’s pocket), perhaps the involvement of an Angel who helps you prepare, followed by one or two rounds of Small Business Investment Corporation or Venture Capital firm financing, followed by a public stock offering.

If you do incorporate your company with the idea of selling the stock rto aise start-up capital, do your homework before taking this route.  It can be done, but if it is done the wrong way you can get in a lot of trouble -- even to the point of going to jail.

Corporate stock offerings are regulated by a variety of state and federal agencies, and depending on what you plan on doing, the requirements for filing forms and paperwork are quite rigorous.  If this option appeals to you, talk it over first with your attorney and your accountant.  They can advise you on this option, and help you do it right.  The last thing you want is the federal Securities and Exchange Commission dropping by for a visit.

Suggested reading:


  1. Seriously, starting a business is really a big challenge because there are important things that you need to consider like having financial budget, business plan and a business website.

  2. A budget? Yes. A business plan? Agreed. However, no one has ever had a business fail for lack of a website in any research I've ever read. For most store front small businesses a website is an option that may or may not pay off. Does someone mowing lawns need a website? Shining shoes? Running a mom and pop grocery? A coffee shop? Operating a food cart? Busking? Selling shoes? A brick and mortar used bookstore? 89% of all businesses are in this category, with fewer that twenty employees, serving a local, walk-in customer who lives usually within a three mile radius. Curb presence is more important for these folks. While they may generate a few prospects via the web, they live on walk-in, drive-by and word of mouth. Some of the businesses I've worked with over the years have websites that generate some business, but most of their customers are word of mouth. For these businesses, a web presence is secondary or even tertiary marketing, not primary. For your business, it's critical, and it appears critical that you focus your marketing efforts on mid-sized businesses of 21 to 100 employees as they are more likely to need web help. ~ Jim


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