More than 6 million people in the United States started a new business in 2015. This was the greatest increase of new business startups in over 20 years, and this increased pace of new business startups has continued in 2016. In a recent Gallup poll that interviewed a diverse group of more than 2,000 Americans, over 50 percent said they would like to start their own business. One of the most important decisions any new entrepreneur will face is how to fund a startup.
How much do you need?
Below is a list showing the amount of money required to fund 85 new startup businesses that were worth at least $1 million two years after they were started:
|Less than $5,000||17.5%||$50,000 to $99,999||15%|
|$5,000 to $9,999||14%||$100,000 to $249,000||8%|
|$10,000 to $19,999||15.5%||$250,000 to $499,000||2%|
|$20,000 to $49,999||25%||$500,000 and up||1%|
(Source: Wachovia Bank)
We can see from this chart that almost 50 percent of these startup businesses had less than $20,000 when they began, so finding enough startup capital is possible for anyone with a good business idea and the commitment to make their new business successful.
There are many ways to fund a new business and in the relative order of difficulty, from the least difficult to the most difficult, the following is a description of the primary sources of startup funding:
Many very successful new businesses have started with just the personal funds of their founders. Whether from savings, a pension fund, credit cards, the sale of assets or a loan against a home, founders may have enough cash, equity or credit to keep a new business going until it starts generating cash flow. Often, entrepreneurs believe the greatest limitation they face is a lack of adequate capital, but it has been shown that poor management is more often the cause of business failure than insufficient startup capital.
Friends and family
If personal resources are not enough to start your new business, the next easiest source of startup funding is from friends and family. Small business funding surveys indicate that more than 60 percent of all new businesses are partially or totally funded through loans or investment from friends or family. This is because by starting with people who know you, have faith in you and want to see you succeed, it is much easier to tell your story and ask for startup capital. One serious mistake a business founder should never make is failing to properly document any loan or investment from a friend or family member in the same way you would with a bank or stranger.
Any business that generates even a small amount of sales revenue can use asset-based lending (ABL) for startup funding. ABL is a type of business finance where a loan, line of credit or other form of funding is secured by specific business collateral (“the assets”). An asset-based loan or line of credit can be secured by accounts receivable, inventory, contract rights, intellectual property and/or other types of balance-sheet assets. ABL programs offer easier and quicker approval, as well as immediate funding, when compared to bank loans.
A startup can raise operating capital through an internet-based crowdfunding campaign. Crowdfunding uses a creative presentation video and information about the business, posted on a crowdfunding website (i.e. www.kickstarter.com) asking people to either donate or invest small amounts of money into the business. Successful crowdfunding campaigns all have the following elements: a product or service that appeals to a large percentage of the buying public, an organized marketing campaign designed to reach thousands of people and create subscription momentum at the beginning of the campaign and an offer that will entice people to buy the item offered or fund the new business.
A common way to obtain startup funding for a new business is through a bank loan. Getting a business loan from a large national bank may be difficult, and entrepreneurs may find it easier to work with a smaller, local bank with a better understanding of the particular business environment. The U.S. Small Business Administration (SBA) is specifically designed to provide loan guarantees for the startup or expansion of small businesses. As with non-SBA loans, the business owner will generally be required to provide a personal guarantee and pledge all personal assets as security for repayment of a bank loan. Since the banking meltdown of 2008, a change in the banking structure and new regulations imposed on banks have made it much more difficult for a small business to get any form of bank financing.
Other funding methods
In addition to the methods of obtaining business financing listed above, there are numerous alternative methods of raising startup or development funding that include the following: leasing of costly items such as equipment or vehicles, third party loan guarantees where a relative or friend will guarantee a loan the business owner can’t qualify for, preferred stock which gives an investor preferred liquidation rights to company assets, strategic business partnerships where a vendor extends credit, advance license fees for technology or other intellectual property and government grants.
Entrepreneurs have many options for raising the initial capital their new business will require. Those who have started a business before know it can take 24 months for a new business to become profitable, so they also know that the funding plan they create may need to make arrangements for more than one form of funding and they take that into consideration as move forward with the funding of their new business.