If the answer to the question “How do I fund my business idea?” were simple, we’d all have businesses. There is no easy answer and almost no single correct answer. But here are the most common options you have - and maybe a few not so common ones.
1. YOP - Your Own Pockets. If you don’t have any money in the bank, you may want to think twice about starting a business until you have a little savings tucked away. That said, lots of people took the business plunge without a safety net. Not the most advisable approach, but if you’ve got a solid plan and unrelenting stick-to-it-edness, you just might make it to the next step.
2. Plastic. Also not a highly recommended approach, but credit cards have been used by many a new entrepreneur to finance their business in the early months or to fill in the gaps in spotty cash flow. Again, I repeat, this is NOT a recommended approach, but if you break out the plastic, be diligent about making payments and paying off the debt as soon as you possibly can to keep your credit rating in tact.
3. F&F Fund - Friends & Family. You could go for the informal “Sister, can you lend me…$10K.” But even when it comes to friends and family, put everything in writing and make sure all parties sign it. The last thing you want to do is lose friends or relationships with family members over a business deal gone bad. But if you speak to most venture capitalists when you get to the VC stage, most will say they look to see how much money you’ve invested in your own company and then they expect to see a round or two from friends and family. It’s practically business tradition.
4. Bank Loan. There are many ways to skin the traditional banking loan. Some entrepreneurs go for lines of credit versus a straight loan with interest. Others get money against receivables meaning if you can show you have contracts or orders that will bring in a “guaranteed” amount of money, you can get almost an “advance” from a bank, with interest of course. And some entrepreneurs shop around and get banks to compete for their business. Even though banks may start with a boilerplate loan agreement doesn’t mean you can’t negotiate terms.
5. SBA Loan. The paperwork on these loans can boggle the mind, however, if you work with your local SBA office, they can help you navigate the maze. Basically, these are bank loans that the SBA guarantees based on certain criteria such as being a certified Woman Business Enterprise (WBE).
6. Angel Funding. Angels are wealthy individuals - sometimes even venture capitalists - who look to invest in business ideas or startups for more than just giving money and hoping for a return. Most want to roll up their sleeves and get involved in the business in some capacity. Angels typically give under $500,000 and rarely over $1 million. Some angels network together and put in a portion of the angel investment. Angels then get a piece of your company like any investor.
7. Venture Capital. Not every business will ever get to the point that they’ll be seeking venture funding. But if you are looking for millions, venture capitalists are often the way to go. Each venture capital firm has a specialty or area of concentration, so do you homework. Almost every venture capitalist will tell you they first judge the team behind the idea, then the idea, then evaluate the business plan and look for how they’ll make their money (IPO, sale of the company, other exit strategy). Many startups have landed venture capital with an idea, a team and a plan. Very few with just an idea.
8. State Grants. Contact your state government - usually the Dept. of Commerce - or your local economic development group to see what funding they offer to entrepreneurs. Some offer technical assistance programs, some offer Community Development Block Grants (hmmm, grants are good - don’t have to pay them back) through your city or town - you never know what they offer until you ask. But don’t go looking for handouts - you need a viable business idea, a plan and the patience to fill out the paperwork.
9. Competitions. Here is something that is a long shot but always worth considering. Every year, universities, organizations and companies hold business competitions. Prizes range from cash to in-kind services and products such as 1 year of free services from an attorney or an accountant. Do Google searches for competitions in your area as well as national competitions. Check with your local business organizations including the Chamber of Commerce. Get in touch with the SBA, the SBDC and other government agencies to see what they offer. Look into contests like this past year’s Whirlpool Mother of Invention Grant.
10. The Lottery. Okay, it’s worth a shot. Now don’t go crazy buying a slew of lottery tickets to fund your company idea - that’s just plain foolish. But if you happen to buy a ticket once in a while…hey, you never know.
How have YOU funded your business idea? What other funding sources have I forgotten to list? Share the knowledge!