Five Key Questions About Funding Your New Business
A hand draws a sketch of a light bulb going off and money signs.
All businesses need money to launch and grow. The three most common ways to get start-up money are loans, equity investment, and personal savings. Each has advantages and disadvantages and are covered in MOBI’s module on how to finance your business . Also, don’t forget that many businesses can be started with very little or no money at all . To get started, you will need to answer some key questions.
1. How much money do I need?
To determine how much money you need, use your business plan to make a list of your expenses for the first few months. Different businesses will have different kinds of expenses, but the following categories are common to almost all start-ups.
- Supplies and inventory
- Rent/building expenses
- Vehicles and mileage
- Internet service
- Marketing and advertising
- Professional fees (accountant, lawyer, etc.)
If you need help determining exactly what you’ll need to start your business and what it will cost, there are a few sources you can turn to for help:
- Your local Small Business Development Center or The Service Corps of Retired Executives (SCORE)
- A friend, family member or acquaintance who has started a similar business
- Vendors/suppliers (they will be able to give you costs of supplies)
- Industry research and guides
For each expense on your list, figure out whether you will need to pay cash or if there is another option. For example, it’s not necessary to pay for a delivery truck in cash. You can lease a truck, or purchase one with a payment plan.
2. How much money can I invest?
Take a look at how much money you have in your personal savings account. Compare it to your startup expenses to determine how much you are willing to invest, and how much you need to raise by getting a business loan or selling equity. Be cautious about investing all of your savings in your new venture because success is far from certain.
The vast majority of new businesses are started with personal savings.
3. How much money can I borrow?
The most common source of borrowed funds is loans from financial institutions. There are many different types of loans and different ways to classify borrowed funds. The amount you can borrow will depend on whether the loan is secured or unsecured.
- Unsecured Loans: There is no collateral for a secured loan. If you don’t have any assets, either business or personal, you may want to consider this option. Examples of unsecured loans include credit cards, friends and relatives, and unsecured lines of credit.
- Secured Loans: For secured loans, assets are pledged to the lender in the event you are not able to pay the loan back. Examples of secured loans include computer leases, home mortgages, car loans, and SBA loans.
For secured loans, lenders go through an evaluation of your collateral to see how much they can lend you. Common types of collateral include equity in your home, commercial real estate, accounts receivable, inventory of the business and equipment.
Lenders look at a number of other variables when deciding how much they can lend you including:
- Number of years in business: This is your track record and is very important. Banks usually require three years, while others are less stringent and are more likely to give out new business loans.
- Size of your company and the amount needed relative to other assets: Financing institutions vary in the way they serve the public. For example, you would probably not get a car loan and a large corporate loan at the same place. Do your research. Ask around. Find the right kind of loan.
- Credit Score: It’s important to keep your personal credit score as high as possible, as banks do take this into consideration when determining whether or not to give you a business loan.
- Monthly Revenue: Lenders will want to make sure that you have enough money coming in to pay back your loan.
4. Where else can I get money?
There are ways to fund your business that don’t include taking out a loan with your local bank, maxing out your credit card or asking your friends and family for help.
Below is a list of possible options for a small business to research and consider:
- Peer-to-Peer (Prosper, Lending Club)
- Micro-Finance Options (Accion, Opportunity Fund, Grameen Foundation)
- Alternative Lenders (Kabbage, Dealstruck, Fundation, Funding Circle, OnDeck)
- Crowdfunding (Indiegogo, Kickstarter, RocketHub, Peerbackers)
- Equity Funding
- Venture Capital
- Angel Investment
- Specialized Lenders (Industry expertise, auto, business brokers, high-tech, specialized equipment, etc.)
- Factoring (selling receivables at a discount to get cash up front)
5. How much are you willing to personally guarantee?
Most lenders will ask that you make a personal guarantee for repayment of the loan. A personal guarantee is a signed agreement to personally take responsibility for repayment of the loan if your new business fails. With a personal guarantee, you are putting your own assets on the line. The actual amount that you guarantee is negotiable – and you should negotiate.
Once you have answered these questions, you can start filling out section 4 of MOBI’s Business Plan Template. After you have your Financial Strategy in place, you’ll be ready to start organizing your business.