Ready to set your great ideas into motion? Your new business idea is just the first step. Next, you need the money to get started. What are your options? What’s your budget and financial projections? How will you manage your personal finances? Use this guide to help navigate startup funding.
What are my financing options?
The first step is finding the right amount of cash to get started. So what are your options?
1. Use your personal funds. This will allow you to fully control the business. But it can limit growth—and potentially strain personal finances.
2. Get external funds. An equity investment or a loan can reduce the personal financial burden associated with starting a business and potentially shorten the time it takes to get your idea off the ground.
To choose the option that’s right for you, you need to understand your assets; your options for funding; and the advantages, disadvantages, and risks of each option.
How do I get funding?
Every startup needs enough money to fund operations and grow.
Build a launch budget.
You need to predict how much it will cost to start your business. The cost will vary by industry, but here are some costs that nearly all businesses have:
- Business setup and legal costs
- Computers and software
- Logo and branding
- Introductory marketing
- Office setup expenses
It’s normal to uncover additional financial needs once the launch process begins.
Create a financial projection.
You’ll need a financial projection to help you plan and budget your business and monitor cash on hand. If you’re seeking external funding, it can also be used to convince prospective lenders and investors of the viability of your business. The projections can be used as a guideline to keep you on track as you get your business going.
So how do you create a projection?
- Gather information about similar businesses in your area
- Talk to a CPA or business advisor familiar with businesses in your industry to look at the type of expenses, sales, and profits you can expect.
- Conductmarket research to determine the demand for your business, which will help you build a business model.
. Remember that growth often requires cash to fund working capital for inventory and accounts receivable.
Explore the best sources of funding.
Your funds can come from a variety of sources. You may draw on your own resources, such as stocks or savings, home equity, or personal credit through credit cards and unsecured loans. You may have family, friends, or angel investors, or you may crowdsource funding. In a limited number of cases, Small Business Administration loans are available. And some businesses can access government programs targeting industries or locales.
You can structure an infusion of funds as an equity investment, a loan, or a combination. Talk to your CPA or attorney about the possibility and limitations for your corporate structure. And study the capital structure of other startup companies in your industry.
Decide on a commitment of personal funds.
Access to funds can determine how quickly you can get your business off the ground. So most entrepreneurs turn to their personal accounts for some portion of the funds. Committing personal funds may be the right choice to protect your ownership and retain future profits.
But committing a large percentage of your personal funds to the new venture is risky. Consider the impact to your personal portfolio of liquidating lower risk investments to invest in a startup. It would change your investment risk profile by concentrating that capital in a single unproven venture (that also happens to be the source of your compensation). That’s a big bet on a startup company.
Consider whether you can afford to go without a paycheck.
Hiring staff, buying supplies and equipment, and building or outfitting an office or store may absorb startup capital and initial profits. The shortfall may come directly out of your pocket in a capital infusion or missed paycheck. Can you afford to go without a paycheck for a period of time? Plan personal backup funds and sources that can be liquidated or borrowed against. And make sure you haven’t used all your personal funds in the initial company funding.