Owning and operating a business is the stuff of dreams for many an entrepreneur. What many new entrepreneurs quickly discover is that starting a business isn’t as easy as it seems. For starters, it requires money.
Rare is the business that gets off the ground with virtually no upfront funding. Even rarer is the business that succeeds in the long term with little to no funding at start up. Thus, funding quickly becomes the overarching concern whenever a new venture is first launched.
Entrepreneurs typically fund their businesses through a combination of the following:
- Personal loans
- Help from family and friends
- Investment funding
- Small business loans
It is rare to completely fund a business with just one of the above options. More often than not, all five options are used at some point in time. A business that remains in operation for many years will continue to avail itself of these options whenever new funding needs arise.
Bootstrapping is the practice of completely self-funding a business enterprise using the business owner’s personal assets. This might mean tapping into a savings account or a 401(k) plan. It could mean liquidating assets like stocks and bonds. Bootstrapping is a good option for businesses that don’t require a tremendous amount of upfront financing.
An online retail business would be a good candidate for bootstrapping. It doesn’t take a lot of cash to set up a website, procure a first round of inventory and do some marketing. The downside is the fact that bootstrapping puts the business owner’s personal finances at risk.
2. Personal Loans
Personal loans are another option. This funding category consists of traditional personal loans as well as second and third mortgages and financing material purchases with credit cards. It is generally recommended that the latter be avoided as often as possible. Interest rates on credit cards tend to be so high that using them to fund business activities is cost-prohibitive.
3. Help from Family and Friends
Many a small business has been partially funded through contributions from family members and friends. A business owner can simply ask for gifts and donations to get things going. A better way to go is borrowing from those willing to contribute. Such borrowing is structured the same way as it would be from a bank. The business owner agrees to borrow a certain amount and subsequently promises to pay back that amount plus interest.
The obvious downside here is alienating family and friends. Things can always go wrong. A small business can have cash flow problems or suffer during economic downturns. Failing to repay family and friends could sour previously strong relationships.
4. Investment Funding
Depending on the nature of the business, it’s possible to recruit investors to put up the funding for a new business. Angel investors specialize in providing significant amounts of startup capital to get new businesses off the ground.
The advantage of investment funding is having access to large amounts of money. The main disadvantage is giving up a measure of control. Investors have no intention of losing money, so they will expect to be given a voice in daily management matters until they get their money back.
5. Small Business Loans
The hardest funding method tends to be a small business loan. Banks are very careful about who they loan to for business ventures. Moreover, they are constrained by law to go above and beyond in verifying borrower creditworthiness before they agree to loan.
According to recent research, conducted by fintech entrepreneur Eyal Nachum, getting a small business loan to fund a new enterprise is extremely difficult. It involves a long and drawn-out process that includes a detailed look at the borrower’s credit history, current assets, and liabilities, income, etc.
Funding a business oftentimes requires creativity and a combination of at least several of the options described in this post. It’s not for the faint of heart, but neither is owning and operating a business. The good news is that there are plenty of funding options available to those willing to do what it takes to make business ownership work.