If you have given your business or idea the green light by:
➢ Shaping it into an acceptable form;
➢ Validating its viable, feasible desirable, and
➢ Counting all the costs, (especially the startup costs),
it's time for the life-giving ingredient- you!
Just like God the Creator breathed life into His creation, you must now blow your life-giving resource into yours.
Then the Lord God formed man from the dust of the ground and
breathed into his nostrils the breath of life,
and man became a living being.
Gen 2:7 MEV
What is your breath of life?
It is your startup capital. It’s the investment you make out of your Financial Capital ($$), Relational Capital (who knows you), and your Intellectual capital (what you know). If these accounts are depleted or worse overdrawn, then your mission is doomed from the start. In most cases, you will have some of each of these, else you likely would not have gotten this far.
Here is a handful of options to fund your startup
Sources of Startup Funding
1. Savings is your simplest, safest, lowest cost source of capital. Drawing from the labor you have already stored up is my most obvious place to begin. This capital is not free. It has a real opportunity cost. If you choose to invest your savings into your business, then it is not available for other purposes like the replacement water heater, new tires, or the kids’ college fund. So, choose wisely and with the advice and consent of the key stakeholders i.e. your spouse, significant other, parents, etc.
2. Framily (friends and family) financing is the next option. It draws on your relational capital. If you take a withdrawal of financial capital from those who know and trust you, be fully aware that the risk is greater than the dollars exchanged. A failure to keep your word could fracture even life-long relationships. So, it is vitally important that you make your deal with them business and NOT personal. This means having a clear, concise legal agreement that specifies the risks, rewards, and limitations of the agreement. Encourage them to thoughtfully consider the offer to invest and review it with their advisors. This way, they can make an informed decision, and preserve the relationship if the deal fails to meet all parties’ expectations. If there is a failure, since failure is always an option, you don’t have to hear them say, “But you said…” Let everything you say of consequence be contained in the legally binding agreement which you've both willingly signed. Save the handshakes and high fives for the celebration!
3. Crowdfunding is Framily funding on steroids, or at least on the world-wide-wide. Beyond pitching your offer to the people in your closest network, you pitch a well-positioned deal to many. There are many sites that facilitate these kinds of deals with great success. This is a federally regulated process that has an associated cost. Crowdfunding is a great option for those with a good business concept, who perhaps can’t get a bank loan or credit, and whose business concept is not big enough to attract venture capitalist seeking the next unicorn. Crowding sites: Kickstarter; Wunderfund; More on Crowdfunding.
4. Bank credit is an option for some. The cost of money (the interest rate%) will be generally higher than the previous 3 options. Banks are generally not interested in making loans to startups. They are far too risky for commercial banks. With its industry average default rate of less than 10%, banks really only want to lend to businesses with established cash flow, profit, and other assets as a guarantee. You might be able to get a loan at 7-10% if you can guarantee the loan with other capital like your house. The SBA offers small business loans. Yet, they often come with fees making the cost of money closer to +10%. With a good credit score, you can even get a business credit card to fund your startup. The thing is you will have to pay back every penny with interest whether the business succeeds or fails. Don’t let a business loan sink your family’s battleship or anchor it in debt.
5. Investors- the most costly and complex option. Shark Tank has glamourized this source of capital and left us thinking there is a world of investors eager to take a chance on our small businesses. Angels and venture capital investors expect to earn 30-300% on their investments. This means it will cost you 30% or more to get their investment vs. the lower cost of money options above. Investors are generally interested in buying equity (a portion of ownership) in your business with the expectation that when your business grows in value, the shares they bought will have grown and can be sold for a big return. Most small businesses don’t have this to offer. The Believer in Business is often more interested in starting a business, running it, and serving her customers for the long term. Unless you are one who expects to grow a unicorn and walk off into the sunset upon selling your business for big stacks, this kind of start-up capital is likely not for you.
There are nuances to all the forgoing, and exceptions to every rule. In today’s economy, there are even business grants available. They are competitive yet broadly available in a variety of industries and communities. See USA Grants and Nav.com for aggregation or small business loan and grant opportunities.