How to Get Money to Start a Business: Guidelines and Resources
© Copyright Carter McNamara, MBA, PhD, Authenticity Consulting, LLC.
Sections of This Topic Include
Preparation
First, Get Ready for Getting the Money
Then Do a Business-Startup Business Plan
Estimate How Much You Need
Then Estimate How Much Money You Need to Start Your
Business
Then Identify Your Best Sources of Funding For
Your Startup
Traditional Sources of Funding
Traditional Sources of Funds to Businesses
- Angel Investors
- Bootstrapping
- Confounding and
Friends
- Loans - Commercial Bank Business Loans
- Loans - Credit Cards
- Loans - Lines of Credit
- Loans - SBA-Backed (Government Loans)
- Venture Capitalists
- Trade Services
Non-Traditional Sources of Funding
Non-Traditional Sources of Funding for Businesses
- Business Incubators
- Grants
- Loan Collateralized by Accounts Receivable
- Microloans
- Peer-to-Peer Lending
Resources for Free Assistance
Sources of Assistance With Your Startup
Also consider
Related Library Topics
PREPARE TO GET FUNDING
First, Get Ready for Getting Money
Be Patient With Yourself Now
There are numerous steps involved in starting a business, as well as in the
planning and getting of sufficient funding for your new business. Investors
will notice how carefully you were in doing those steps. You'll end up doing
those steps in a proactive and planful way if you do them now -- or you'll do
them in a highly reactive and chaotic way later on. Take it one step at a time.
Remember the guidelines in:
How
to Stay Sane During Planning
Get Your Personal Finances in Order Now
Do a personal budget now and in a format that makes sense to others. In the budget, make sure that you have sufficient funds to pay your personal bills at least until your new business makes sufficient profits to pay your personal bills as well as the business's. The reasons for getting your personal finances in order now include:
- Investors and funders will want to see that you believe in your business idea so much that you are willing to invest your own funds.
- Banks and other lending institutions will want to see a strong credit rating from you, as well.
The following Library topic provides a variety of resources for you.
Introduction
to Personal Financial Management
Be Willing To Seek and Accept Help
There are numerous sources of assistance in starting and funding a new small
business. Be sure to scan the sources at
Sources
of Assistance With Your Startup
Also consider
Getting and Using Banker
Getting and Using a Consultant
Getting and Using a Lawyer
Getting and Using an Accountant
Then Do a Business-Startup Business Plan
Consider Steps in Starting a Business
If you are looking for money to start a new business, then you first should think about what's involved in starting a new business even before you get the money to start it.
If investors know that you had the wisdom to very carefully think about those
first steps, then they are much more likely to give you the money to start the
business.
Reference
Manual for How to Start a Business.
Then Do Business Startup Business Plan
Most types of investors will ask for a well developed business plan. A business plan will guide you to carefully think about how your business can regularly make a profit over time.
The above-mentioned Reference Manual for How to Start a Business will specify when to start that business plan. It also will link to another Library topic that will guide you to do the right kind of business plan for your needs.
If you want to read about business planning now, this topic will guide you
through every step of developing one. In that topic, be sure to focus on the
"startup" design of a business plan.
All About Business
Planning
Also consider
How
Do You Know You're Financially Ready To Start A Business Full-time?
Are You Ready to Seek
Funding? This 10-Point Checklist Will Decide
How
to Prepare for Your First Round of Startup Funding
Five
Things Small Business Owners Should Prepare to Ensure Funding Success
Then Estimate How Much Money You Need to Start Your Business
Depends Especially on the Type of Business You Are Starting
The amount of money that you'll need depends on whether you're starting a:
- Manufacturing business -- that includes getting different types of resources, storing them, assembling them and shipping them to the customers.
- Online store -- that includes designing online catalogs of products, utilizing credit card processing services, arranging order fulfillment and shipping products to the customers.
- Service industry -- that includes developing and retaining sufficient expertise, understanding customer needs and working with customers to meet their needs.
For Now, Identify Typical Business Startup Costs
There are standard startup costs that you will probably incur regardless of the type of business you are starting, for example: legal filings, professional services, facilities, labor costs, marketing, website design and maintenance, computers and software, and telephones.
Here is a very useful spreadsheet that lists and and organizes many of the
typical startup costs. It includes directions to download it to your computer
and then open it in a spreadsheet.
Small
Business Start Up Costs
Then Compute Your Business StartUp Costs
One Simple Overall Approach
You can arrive at the same amount by taking a variety of different approaches. For example, the article How to Estimate Start-Up Costs suggests:
- List your likely spending on the assets in your business, for example, facilities, mortgage, shelves, tables, a cash register, etc.
- Then list your likely spending on typical expenses, such as those in the above-mentioned spreadsheet.
- Then determine how much you'll need to get started by adding up the spending from numbers 1 and 2. It's not likely that you'll get money from profits during the first six months of operations. So spread the total of your expenses over the first six months to give you a better idea of how to spend the money.
A More Specific Approach
The article Startup Costs: How Much Cash Will You Need? suggests a more specific approach including:
First, estimate your costs, including:
- One-time costs - professional fees (lawyer, accountant, etc.), loan fees, equipment purchases, bookkeeping software, etc. (these are "variable costs")
- Ongoing costs - rent, utilities, supplies, etc. (these are fixed costs)
Or:
- Essential costs - rent, labor, computers, etc.
- Optional costs - enhancements to furniture, services you could do yourself, etc.
Or
- Fixed costs - that you cannot avoid
- Variable costs - that vary with your rate of sales
Draft a Business Startup Cash Flow Statement
Then, estimate your cash flow -- how much you'll spend and need -- for the
first six months. This is the most important financial statement to do when
starting a business. It tells you whether you can pay your bills or not. Here
is a downloadable spreadsheet to start your basic cash flow spreadsheet.
Cash Flow
Forecast template
Also consider
Calculate
Your Startup Costs
How
Do You Know You're Financially Ready To Start A Business Full-time?
Startup
Basics: How Much Money Do You Need to Start a Business?
How to Evaluate Start-Up
Costs
Startup
Costs: How Much Cash Will You Need?
Now Identify Your Best Sources of Funding for Your Startup
There is a wide variety of sources of funding for startup businesses. For example, this article Startup Funding Comparison Table compares the features of each of 31 different types. Most new startups use a variety of sources for funds. The following is an overview of the most often mentioned sources for startups. The following list is by alphabetical order only.
Traditional Sources of Funds to Businesses
At the time of this writing (2019), the following sources are frequently mentioned in literature about funding for businesses.
Angel Investors
These are wealthy individuals or groups who invest in startups to make a profit
and/or to assist a business that is closely affiliated with the interests or
causes of the investors. These investors are usually very familiar with the
challenges of starting and developing a small business and, thus, can be very
useful to business owners. These investors want comprehensive and due diligence
(fact-gathering to analyze the startup) before they invest. They might want
partial ownership and decision-making in the business.
Angel
Investor Groups
How
Angel Investors And Angel Groups Work
The Top 10 Angel Investor
Groups
Bootstrapping
This source includes your own money either from your own savings or money generated
from your private assets. Investors often want to see that the entrepreneur
will invest some of their own funds. This source is often used as "seed"
money, that is, to fund the new business until other sources of funds are obtained.
How
to Bootstrap Your Small Business From the Ground Up
6 Sources of Bootstrap
Financing
25
Amazing Ways to Bootstrap Your Business
Crowdfunding
This source includes a marketing campaign via social media that aims to raise
small amounts of donated money from numerous individuals and organizations.
As written at Launch
Your Idea With These Top Crowdfunding Services, "If your business is
a startup or doesn’t quite meet the bank’s requirements for a conventional
loan, or you just want to stay out of debt and keep 100% ownership, then crowdfunding
your idea may be a viable solution for your funding needs."
8
Crowdfunding Sites: Which Is Best for You?
Family and Friends
This is another popular source of funds for startups. Although they are family
and friends, the terms of this grant or loan of funds from this source should
still be carefully specified in a loan agreement, especially to avoid confusion,
frustration and troubled relationships in the future.
Family
and Friends Financing
How
to Borrow from Family and Friends
The
Right Way To Get Funding From Family And Friends
Loans - Commercial Bank Business Loans
There is a trend away from commercial banks giving loans for small startups.
Estimates are that about 35% of small businesses get funding via this means.
Banks want evidence of collateral that will subsidize the loan, a good credit
history and/or that the borrower having strong experience in the industry of
the business. A personal loan can take as few as a couple of days if the bank
already knows the borrower. A business loan from the bank usually takes up to
a few weeks.
10
Things the Bank Will Ask When You Need a Business Loan
How
to Get a Loan to Start a Business: Follow These 4 Steps
How
to Get a Loan to Start a Business: What to Know About Startup Loans
Loans - Credit Cards
The advantage of using a personal or business credit card is that funds can
be immediately available and the funds usually do not need to be secured by
collateral. Funds are usually in small amounts, for example, $2,000 to $3,000
to help get the business started or through various shortages of cash. The borrower
pays an interest rate on the borrowed funds and usually, the stronger the borrower's
credit ratings, the lower the amount. A downside of this approach is that it
is a very expensive way of addressing cash shortages and can end up hurting
the borrower's credit history.
Can
I Fund a Startup With My Credit Card?
8
Steps To Wisely Financing A Business with A Credit Card
When
Is Using Credit Cards to Fund Your Business Right?
Loans - Lines of Credit
A startup business line of credit is a loan that is usually backed by the borrower's
collateral, for example, a home or significant property. The borrower can continue
to borrow up to a pre-set limit. Thus, it is similar to a credit card. Interest
rates are often lower than the typical credit card rates.
Business
Line of Credit: How It Works and Best Options
Small Business
Line of Credit: How to Choose the Right Option
The
Pros and Cons of a Startup Business Line of Credit
Loans - SBA-Backed (Government Loans)
The Small Business Administration (SBA) in the United States of American backs,
or guarantees, the payments of loans for small businesses. (If the borrower
defaults, the SBA pays off the loan.) Advantages are that the loans are usually
less expensive to start, have flexible eligibility requirements and come with
advice about starting and running the business. Loans are provided based on
the business's expected income, nature of its ownership and where it operates.
SBA Loans
SBA
Loans: What You Need to Know
Find the Lowest
Rates on SBA Loans
Venture Capitalists
This is usually an organization, rather than a singular individual, comprised
of experts in starting and developing businesses. They seek significant returns
or increases in profits from their investments. They usually invest primarily
in businesses that show clear evidence of strong current and/or potential growth.
A major benefit of this source is availability of ongoing advice and resources
to help the business. Similar to angel investors, they expect careful due diligence
and partial ownership regarding their investments.
10 Tips
for Finding Outside Investors for Your Business
How
To Get Venture Capital Funding For Your Startup
The Entrepreneur's
Guide to Venture Capitalists
Non-Traditional Sources of Funding for Businesses
At the time of this writing (2019), the following sources are occasionally -- but not yet frequently mentioned -- sources of funding to businesses. The following list is by alphabetical order only.
Business Incubators
A business incubator is an organization that assists startups by providing
specialized facilities and services. The incubator's overall goal is regional
or national economic development. Facilities might be, for example, shared office
space or computer equipment. Services might be trainings on activities to start
and management startups.
Business Incubator
25
Diverse Startup Incubators
The
Top 40 Startup Accelerators and Incubators in North America in 2019
Grants
These are funds given to small businesses in certain industries, especially
those that benefit society, in scientific or research. They are not always limited
to nonprofit organizations. However, it take a long time to apply and receive
these kinds of grants. Also, they often are highly competitive to get because
many organizations apply to get them.
Small-Business
Grants: Where to Find Free Money
Small Business
Grants: 107 Ways to Get Free Money for Your Business
Small Business
Grants: 21 Best Places for Free Money in 2019
Loans Collateralized by Accounts Receivable
Accounts receivable includes the money that customers owe to the business when
they bought items on credit. So, in effect, these receivables are a form of
money in that they have strong likelihood of become actual money when they are
paid by the customers. Thus, they can be used as collateral by the business
when borrowing money for its own expenses.
Overview
of Accounts Receivable Financing
How
to Show Accounts Receivable Used as Collateral
What
is a Line of Credit Secured by Accounts Receivable?
Microloans
As defined at What
Are Microloans?, "Microloans are typically defined as very small, short-term
loans with a low-interest rate, extended to self-employed individuals, new startups
with very low capital requirements, or small businesses with only a few employees."
Everything
You Need to Know About Microloans for Startups
The 5
Best Microloans: How and Where to Get Them
Peer-to-Peer Lending
This is a type of funding in which a person can get a small loan from a collection
of other individuals (investors). The loans are facilitated by a variety of
online organizations to which a person submits an application for a loan. The
organization lists the loan applications in a directory that investors can review.
Each application has a deadline to be funded. The facilitating organizations
ensure the applications are complete, including to get the borrower's credit
information. These loans usually have affordable interest rates and are not
secured, or collateralized.
Peer-to-Peer
Lending for Small Businesses
Peer-to-Peer
(P2P) Business Loans: Where to Find Them
How
to Use Peer-to-Peer Loans to Fund Your Small Business
Trade Services
This source includes trading one or more assets (cash, expertise, services,
facilities, stock, etc.) of the startup business for one or more assets owned
by another. As to whether it is a trade or not depends on the specifics of the
exchange. It can be an advantage to a startup that already has strong expertise
in various areas, but that needs other assets to develop to the next stage.
The
Top 5 Considerations When Trading Equity For Services
7
Things to Consider Before Trading Your Services for Equity
As
a Startup, Is It Better to Find a Way to Pay for Services or Trade Equity for
It?
Also consider
The
Most Common Funding Types for Young Startups, Explained
How
to Fund Your Business Startup: 5 Fast and Popular Options
Small
Business Financing Options Without a Traditional Bank
9
Realistic Ways To Fund Your Startup
The 10 Most Reliable
Ways to Fund a Startup
Sources of Assistance With Your Startup
Business Startup Templates and Calculators
Small
Business StartUp Costs (template)|
SCORE Start-Up Expenses
(template)
This
Is the Best Budget Template for New Business Owners (template)
Business Startup
Cost Calculator
CardConnect
This
Free Small-Business Budget Template Will Take Your Bookkeeping to the Next Level
Essential
financial tools: a free budget template and guide
5
Free Small Business Budget Templates
How
Much Money Do You Need to Start a Business?
Sources of Free Assistance
The sources of free assistance to getting funding are very similar to those
who assist in starting businesses. The following link is to a large number of
free and helpful sources of assistance.
Free
Help to Start a Business
Learn More in the Library's Blogs Related to This Topic
In addition to the articles on this current page, also see the following blogs that have posts related to this topic. Scan down the blog's page to see various posts. Also see the section "Recent Blog Posts" in the sidebar of the blog or click on "next" near the bottom of a post in the blog. The blog also links to numerous free related resources.
Library's
Business Planning Blog
Library's
Building a Business Blog
Library's
Strategic Planning Blog
For the Category of Financial Management (For-Profit):
To round out your knowledge of this Library topic, you may
want to review some related topics, available from the link below.
Each of the related topics includes free, online resources.
Also, scan the Recommended Books listed below. They have been
selected for their relevance and highly practical nature.