You’ve got a great idea for a business, but it’s going to take some capital and you don’t have that. You might also realize you need to quit your job and are worried about what you’re going to live on when it’s going. Since you’re not quite ready for Shark Tank, what are your options to get the doors open?
There are four main ways to get money to start a business:
- Sale of Equity
That’s assuming your business hasn’t yet build up assets that you could sell. Let’s look at each of these options in a little more detail.
#1: Sales This is my favorite way to find start-up money. You not only are getting the needed cash, but you’re testing your model right away. Do people like your product or service? Is it the right price point? If you’ve got a service-based business, this, of course is easier to do. You’re ready to go to market almost immediately. If you’ve got a big, elaborate product to design, test, manufacture, test and then build a market for, you’re going to need more cash and you’re slower to get to market. Make sure you have the cash to do that.
#2: Loan Most people start their business off by looking for loans. They know they’re going to need to money to fund building the business and aren’t sure how to get sales to cover that. (Like I said, I really recommend getting sales right from the start. If you can’t sell then, how will you sell later?)
If you can find personal loans at decent rates that won’t downgrade your personal credit score, I think this is the second best option for finding money. If the loan is at a decent rate, then you’re much further ahead when the business becomes profitable. Would you rather pay 10% interest and be done with it when the principal is repaid, or give up 10% of a money-making business forever?
Anytime you sell equity, you are bringing in a partner for a small business who will have opinions about your business. If you’re going public on a stock exchange, then that isn’t the same issue. But, most likely you’re not going public right out of the gate.
There are also some options for SBA loans if you have a good personal credit score and are prepared to personally guarantee the loan. You may find some grant money if you fit special circumstances. The VA has programs for disabled veterans. And, your local bank may be in a place to give you a loan, collateralized by some of your personal property or even just your own good name (and credit score.)
#3 Gifts It used to be that start-up gifts were mainly from family members. Now, sites like GoFundMe and IndieGoGo let you crowdsource new business start-ups. There have been some remarkable wins through crowdsource sites. There have been a lot that didn’t make it. If you can capture the attention of the Internet, you might just have the best possible way to fund a start-up. I’ve never done it or had a client of mine succeed at it, but I still think it’s a possibility. I’ve listed it as #3, simply because I don’t have first-hand knowledge and don’t know strategies for making this work.
#4 Equity I’m always cautious at using equity to fund a small business. Every equity partner is, no matter what, a partner. If you get a loan, you will get someone who wants their money back. As long as you make the agreed-upon payments, they’ll leave you alone. If you sell equity, you have someone who is a partner in your business…..forever. My biggest business mistakes have been when I bring in a wrong partner. Maybe I was looking for some talent I didn’t personally possess or I was sold on the idea that we were both going to create something bigger, but every time, the downside far out-weighed any possible upside. And a business divorce can be very, very costly.
If you want to bring in a partner, I recommend this three step process:
- Ask yourself honestly, can you buy what they bring to the table? (I’m talking here about very unique abilities or connections.) If you can hire them, do that instead. If they will take less money now if they get ‘a piece of the pie’ than give them an agreement for a percentage of profit. That doesn’t give your company away.
- If you really want a partner, go through every possible eventuality and address it in the partnership agreement. What happens if they die? What if they get divorced? What if they have a bankruptcy? What if they quit working in the company?
- ALWAYS get a buy-out agreement so it’s very clear how you value the company at a future date and what it will take to but out your partner (or have them buy you out.) This also establishes the value in case of death and you need the value for estate tax purposes.
This has been a long blog post today and we’ve only touched on the surface of things to consider regarding funding your business. Each of the steps has ramification of its own. And each step requires professional expertise.