Finance Your Startup: Seven Realistic Ways

Improve your odds of getting funded and make the process easier by pursuing realistic options when looking to finance your starup.

Looking for a way to finance your startup?

One of your highest priorities as an entrepreneur is getting your new business funded. Without funds, you won’t be able launch and execute your business. So how do you finance your startup?

The funding process is inherently difficult and can be challenging for some. However, you can improve your odds of getting funded and make the process easier by pursuing realistic options.

This article lists seven ways to finance your startup that are available to most small companies – including everything from self-financing to external financing. Their common trait is that they are realistic and accessible to most entrepreneurs.

Option #1: Your savings

Most entrepreneurs finance their startups using their own money, in part because no one else will make the investment.

These entrepreneurs spend years working hard at their regular job. They don’t spend extra money on luxuries, instead preferring to save as much as they can. Once they have saved their desired amount, they launch their startups and execute their business plans.

In my view, this is the best way to fund your startup. You don’t have investors, so you answer only to yourself. This approach gives you incredible freedom to operate the company as you see fit. By the way, I speak from experience. This is exactly how I financed my own startup ten years ago. It was one of the best business decisions I ever made. I am happy with my choice and I am glad I never took anyone’s money.

Option #2: SBA Microloan

One great way to finance a startup is to use an SBA Microloan. They are a fantastic resource, especially for companies that have low startup costs.

This little-known program provides up to $50,000 (amounts vary by state) to entrepreneurs who are launching or expanding their businesses. Unlike conventional loans, Microloans are relatively easy to get.

However, the SBA does not provide Microloans directly. Rather, they use intermediary organizations to do the lending. A major advantage of these loans is that they often come bundled with business counseling, which makes them an ideal option for new entrepreneurs who need advice as well as funds. Here is a list of providers by state.

Option #3: Friends and family investors

Another popular way to finance a startup is to borrow from friends and family. In my opinion, this approach is one of the riskiest ways to finance a business. If things don’t go as planned – and they never do – you jeopardize valuable relationships. I consider this cost too high.

However, if you decide to use friends and family investors, treat them the same way you would treat professional investors. Ask only people who have an interest in the business and who will provide more than just money. Ideally, they should also provide work, advice, or contacts.

Prepare a professional presentation and make sure they understand all the risks. Lastly, get legal advice on how to structure the investment. If you decide to go this route, here are some tips on how to ask friends and family to invest in your business.

Option #4: Credit cards

Using credit cards to finance a business is a time-honored tradition by entrepreneurs. You leverage your good credit and put it to work for your business. Obviously, if things don’t go as planned, your credit suffers.

If you decide finance your startup with credit cards, do so selectively and strategically. For example, use the funds to buy supplies or pay vendors for a specific client project. Pay the credit card back as soon as your client pays you. For many, this calculated risk is worthwhile because it allows them to grow their startup.

Entrepreneurs often choose to get financing through a home equity line of credit (HELOC). For most entrepreneurs, this strategy is not a good idea. Betting your house is just too risky – at least for me it is.

Option #5: Factoring invoices

Some B2B startups do well during their launch but encounter cash flow problems later because of slow client payments. Corporate and government clients usually pay invoices in 30 to 60 days. Unfortunately, few entrepreneurs account for this delay when planning their finances. This delay can lead to cash flow problems.

Invoice factoring is a financing tool that solves this problem. This tool allows you to finance slow-paying invoices, which improves your startup’s cash flow. Factoring is relatively easy to get. The most important requirement is to work with B2B clients that have good commercial credit. You can find more information here.

Option #6: Financing purchase orders

A common problem for startups that sell products in the B2B space is getting an order too large for them to fulfill. You have the order but don’t have the funds – or credit – to pay suppliers. Eventually, the order falls through.

One way to handle this situation is to use purchase order financing. Purchase order financing enables you to finance a specific order based on the financial strength of your client. This tool gives you the funds to pay suppliers, which allows you to fulfill the order and get the revenue. You can find more information here.

Option #7: Conventional SBA Loans

SBA loans aren’t often promoted as a way to finance your startup. However, these loans can be very useful for more mature startups that are past their launch phase. While loans can approach $5,000,000, the average loan is for about $300,000 (2012 data). As you can infer, these loans are used mostly by small businesses.

SBA loans are offered by banks but are guaranteed by the SBA. Therefore, your company must meet the bank’s funding criteria. If you choose this route, ensure that your paperwork and financial records are in order. Consider seeking the help of a CPA. You can find more information here.

What about venture capital and angel financing?

You have probably noticed that venture capital and angel financing are not on the list. Although these finance options are popular in the media, I believe that they are not realistic options for most entrepreneurs. The average startup should consider getting funding elsewhere – at least initially.

Venture capitalists and angels invest only in opportunities that will scale and generate outsize returns. This last point is very important. They don’t want a great opportunity – they see those every day. They want an awesome opportunity. The fact is that only a few ideas meet this high standard of funding.

Another problem of looking for venture funding is that the search requires a lot of effort by the founders. However, the process rewards only a select few. Many entrepreneurs spend significant time refining their presentations and end up with nothing to show for their efforts.

This is not to say that venture funding is a bad idea. Quite the contrary. It’s a great type of funding for certain types of businesses. If you choose to pursue venture funding to finance your startup, invest some money and time to get your business started. Develop a prototype and get some beta clients. Ideally, get some revenues too. Showing real revenues is a great way to show venture capitalists that your business has potential.

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