A successful business takes a lot of time. As the old adage goes “time is money”, and you will likely need a lot of both if you want to see your business take off. Funding is an important aspect of any startup, but not all funding is created equal.
You have many options for how to finance your business operations and each comes with its own set of pros and cons. You can choose one or utilize multiple options. What is important is that you thoughtfully consider what is best for you and your business rather than taking whatever comes along first with the greatest ease.
So What Are my Options?
You can find investors to fund your business. There are multiple routes to this as well, from crowdfunding to partnerships. An investor is someone who puts money or resources into your business, but like the name suggests they often expect to get a return on their contribution.
Finding investors can be a good solution for you because it doesn’t typically require monthly payments. Investors may require a profit split, ownership percentage, a specific percentage return or any number of things in exchange for their investment.
You may have more free cash flow upfront not having to worry about monthly payments. You also may have the benefit of investors vested interest in your business. They will be quick to offer input, advice, and may even contribute more capital if the need arises.
In many cases you may not need collateral or any money of your own. Investors are aware of the risks going in, so another benefit is that if the business fails you aren’t on the hook to repay that money.
Keep in mind though, that the greater risk your investors are taking, the more they are going to want in return. Whether that’s control, money, or ownership they will want something for their contributions.
Unfortunately, if your goal is to work for yourself, you will also have to answer to investors. They may want some form of control or threaten to pull out if you don’t do things their way. You may be trading one manager for another.
Finding investors can be a great thing, just weigh your options first.
Small business loans are probably the most common method for funding startups. They are readily available and generally fairly easy to obtain as long as you’ve done your due diligence. Which, if you have been following my series on How to Start a Successful Business You love, at this point you should be well prepared.
The nice thing about these loans is that the interest and terms are usually manageable. The lenders want you to succeed so they aren’t normally going to try to kill you on the loan. The SBA has tools to help match you with lenders based on your business profile and needs.
The downside is that while your loan should be manageable, a payment is still a payment. A portion of your cash flow will be tied up for the duration of the loan and you’re paying interest.
Additionally, most business loans require you to contribute 10-20% of the total amount needed for the project. So if you needed $200 thousand to start the business, then you would be expected to come up with $20-40 thousand yourself. Some may also require a certain level of collateral, but that can usually consist of business assets. So if you are buying equipment for your business with the loan, then that equipment would count toward the collateral.
Contrary to some investor agreements, the payments on a loan do eventually stop. There is no shared ownership and no ongoing dividends. Not only that, but you retain full control throughout the life of your loan and beyond.
Choosing to go the route of self-funded probably takes the longest but offers some great benefits. First, you don’t have any payments so your cash flow can be utilized quickly to invest back in your business. Next, there is no interest or investors for you to pay. That means that every dollar has a slightly bigger impact in your business, since a portion of it isn’t going toward paying interest.
Furthermore, you don’t have to answer to investors. Every decision is your own (within the confines of legality). That is a double-edged sword however, because the consequences of those decisions are yours also. Not only that, but you miss out on the benefit of guidance from the experienced business professionals who typically invest in startups.
Lastly, the biggest downside to being self-funded is the time it takes to raise enough money to start. You should have enough capital to cover about 6 months’ worth of expenses before you open the doors. Unless your business is something akin to a small lemonade stand then it may take years to save that kind of money.
You don’t have to settle for just one funding source. Its perfectly acceptable to mix and match your funding. For example, if you wanted to take out a loan but you only had half of the 20% you needed, then you could look for investors to cover the other 10 percent. The SBA is a great resource for finding investors as well as loans and other business resources. There are many more funding options than these, including grants and I highly encourage you to check them all out.
What is ideal will depend on your situation and preferences, so I encourage you to play around with the numbers. Continue to research and find what works best for you.