Some entrepreneurs can be incredibly creative in finding ways to fund their ideas. Many work another job as a way to fund their personal business. Others finance their enterprises by going back to school. Business schools often can give you the tools and connections to get a business off the ground. Your classmates may be good business partners or the school may have a business plan competition with a prize of start-up funding for the busines.
Most companies, however, find their start-up funding in more conventional ways. The most common sources are:
- 72% Personal Savings
- 45% Banks
- 28% Friends/Relatives
- 10% Individual Investors
- 7% Government-guaranteed Loans
- 1% Venture Capital Firms
Using personal funds is very common, partly because few banks will loan to people who not risked some of their own personal funds. However, in the long run, most businesses will need external funding of some type.
The conventional wisdom in starting a business is that it is no one will loan money to a startup. With no history and no assets, one either needs to have savings, friends and family who are willing to help or an angel. While it is impossible to deny the challenges, loans do exist and with good preparation are even relatively easy to get.
Being prepared has to be first step in seeking external funding. Write a business plan, prepare financial statements, line up references, develop a clear definition of what the business enterprise is, get introductions, and look at how you rate on other factors such as your credit rating, financial history, and business planning that lenders consider in awarding loans.
Learn the lingo. It can be embarrassing to misuse terms. That immediately labels you as someone who has not done their homework - and consequently is not a good investment candidate. The Small Business Glossary lists a large number of terms you should know before talking with any person you may seek funding from.
Find out which are the right banks to approach if you want to go that route. The Small Business Administration has put together a list of commercial banks that scores the banks on how aggressive they are in small business lending. You can find which banks are business friendly in your area through their search mechanism.
One of the toughest questions is how much capital is enough. A quick model for cash needs suggests determining how much capital is needed for one year of operation. That first year, keep your initial capital separate from your income. That income should then be the initial capital for the second year. Amounts you will need to finance are that initial capital and any growth you want to introduce above and beyond the initial model. Many companies that are successful today have started that simply.
