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When starting your own business, it is important to consider how you will fund the business when it first starts, as well as the initial costs discussed in How Much Money Do I Need to Start?
In this section, we'll discuss four different categories of funding which businesses can recieve.
Personal Savings
Personal Savings
You can use your own money to start your business, depending on how much you want to invest in the company. This is also known as bootstrapping.
Debt Financing (Loans)
Debt Financing (Loans)
Bank Loans - Receiving a loan from the bank can be a good way to receive some money upfront, but be aware that you will have to pay back the amount plus more (interest) over time.
Merchant Cash Advances - A company gives a business a lump sum of cash upfront. In return, the business agrees to repay that amount, plus a fee, by automatically giving the company a percentage of its daily credit or debit card sales.
Merchant cash advances are typically more expensive than typical bank loans, and are often used by businesses need quick cash or cannot qualify for traditional financing.
Equity Financing
Equity Financing
These options are for if you are willing to give up a portion of ownership within your business, in exchange for money.
Angel Investors: High net worth individuals provide money in exchange for a stake/percentage of company ownership.
Venture Capitals: Firms that invest in high growth startups, in exchange for equity.
Alternative Funding
Alternative Funding
Crowdfunding: Raising small amounts from many people via platforms, often offering products as rewards instead of equity.
Grants: funds from government, foundations, or corporations to start your business with.
Friends and Family: Loans or investments from personal networks.
In most cases, funding is needed for growth. However, it is also important to make sure that you are careful with what type of funding you are taking on, especially with debt. Too much debt can put you into a hole which you may not be able to recover from, so always make sure you have a feasible business plan.
Funding Readiness Self Check
Funding Readiness Self Check
To help, here are some general questions to ask and score yourself upon to determine whether you are ready for funding such as bank loans and merchant cash advances.
Do you have consistent monthly revenue (at least 6–12 months)?
Can you clearly show your average monthly sales?
After expenses, do you usually have positive cash flow?
4. Do you have updated bank statements (last 3–6 months)?
5. Do you have a basic income statement (profit & loss)?
6. Do you separate your business and personal finances?
7. Do you know your current business debt in total?
8. Can you clearly explain why you need the funding?
9. Do you know exactly how the money will increase revenue or profit?
10. Have you calculated how much you can afford to repay monthly?
11. Do you understand the total repayment amount, not just the monthly payment?
12. Do you have a backup plan if sales slow down?
If you scored a 9-12, than you are likely ready for funding and know the risks.
If you scored a 4-8, you may need more education and a better plan to ensure you do not put yourself into debt.
If you scored a 0-4, you likely do not have a solid plan or means of paying back the money you take out, putting you at risk.
*The advice offered above is a sample guideline and should not be taken as sole advice when making key decisions.
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