It costs money to start a business. Funding your business is one of the first — and most important — financial choices most business owners make. How you choose to fund your business could affect how you structure and run your business.
Every business has different needs, and no financial solution is one-size-fits-all. Your personal financial situation and vision for your business will shape the financial future of your business.
Once you know how much startup funding you’ll need, it’s time to figure out how you’ll get it.
Otherwise known as bootstrapping, self-funding lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends for capital, using your savings accounts, or even tapping into your 401(k).
With self-funding, you retain complete control over the business, but you also take on all the risk yourself. Be careful not to spend more than you can afford, and be especially careful if you choose to tap into retirement accounts early. You might face expensive fees or penalties, or damage your ability to retire on time — so you should check with your plan’s administrator and a personal financial advisor first.
Investors can give you funding to start your business in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in the company.
Venture capital differs from traditional financing in a number of important ways. Venture capital typically:
Almost all venture capitalists will, at a minimum, want a seat on the board of directors. So be prepared to give up some portion of both control and ownership of your company in exchange for funding.
There’s no guaranteed way to get venture capital, but the process generally follows a standard order of basic steps.
John and Kelly calculate their startup costs to figure out how much funding they need to get their auto repair shop off the ground.
They can afford to pay for some of the startup costs themselves. The self-funding effort has limits, however, as they don’t want to draw from their retirement accounts.
After speaking to a financial advisor and finding they're still 60 percent short of their funding goal, John and Kelly look for investment capital. They contact several firms, eventually getting a meeting to present their business plan.
One investment firm offers 20 percent of their funding goal in exchange for part ownership of the company. John and Kelly secure another 10 percent by starting a crowdfunding page online. Many residents are eager to have an auto repair shop in town, and they visit the site to donate.
But John and Kelly are still 30 percent short of their funding goal. Many investors and banks have not invested because they think there’s too much risk involved. Then John and Kelly learn about SBA-backed loans and get the money they need by connecting with lenders through the SBA's Lender Match tool.
SBA's loan guarantee provides incentive for these lenders to do business with John and Kelly.
Crowdfunding raises funds for a business from a large number of people, called crowdfunders. Crowdfunders aren’t technically investors, because they don’t receive a share of ownership in the business and don’t expect a financial return on their money.
Instead, crowdfunders expect to get a “gift” from your company as thanks for their contribution. Often, that gift is the product you plan to sell or other special perks, like meeting the business owner or getting their name in the credits. This makes crowdfunding a popular option for people who want to produce creative works (like a documentary), or a physical product (like a high-tech cooler).
Crowdfunding is also popular because it’s very low risk for business owners. Not only do you get to retain full control of your company, but if your plan fails, you’re typically under no obligation to repay your crowdfunders. Every crowdfunding platform is different, so make sure to read the fine print and understand your full financial and legal obligations.
If you want to retain complete control of your business, but don’t have enough funds to start, consider a small business loan.
To increase your chances of securing a loan, you should have a business plan, expense sheet, and financial projections for the next five years. These tools will give you an idea of how much you'll need to ask for, and will help the bank know they’re making a smart choice by giving you a loan.
Once you have your materials ready, contact banks and credit unions to request a loan. You’ll want to compare offers to get the best possible terms for your loan.
If you have trouble getting a traditional business loan, you should look into SBA-guaranteed loans. When a bank thinks your business is too risky to lend money to, the U.S. Small Business Administration (SBA) can agree to guarantee your loan. That way, the bank has less risk and is more willing to give your business a loan.
Use Lender Match to find lenders who offer SBA-guaranteed loans.
SBICs are privately owned and managed investment funds licensed and regulated by SBA. They use their own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses. Learn more about SBICs to see if your business might qualify.
This program encourages small businesses to engage in federal research and development that has the potential for commercialization. Find out if the SBIR’s competitive awards-based program makes sense for you.
This program offers funding opportunities in the federal innovation research and development arena. Small businesses who qualify for this program work with nonprofit research institutions in the early and intermediate stages of starting up. Find out if the STTR program makes sense for your business.
