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Six-Week Start-Up: A Step-

The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything

Small Business Start-up Guide: A Surefire Blueprint to Successfully Launch Your Own Business

The Small Business Start-up Kit (Law for All Series)

Legal Forms for Starting and Running a Small Business

Previous:
How to Write a Business Plan

Next:
First Steps: Incorporation and More

How to Get Funding for Your Business

Nearly every new business requires some level of funding to get off the ground, even if it’s $200 to have business cards printed. But when your funding needs exceed the balance in your bank account, you’ll want to be aware of possible sources of additional money. These sources include:

Personal savings: This includes any money you’ve socked away in a checking or savings account, your 401(k) from your last job, your IRA, any stocks and bonds, or other assets you can tap into to cover startup costs.
Second mortgage: You can take a second mortgage against your home in exchange for a chunk of cash. In return for the up-front cash, you now have an additional set monthly payment due. If you fail to make the payments, though, the bank will foreclose.
Family and friends: Money borrowed from family and friends comes with built-in benefits such as zero interest and leeway for reimbursement. But be sure to treat this debt as you would any other, or loved ones may feel you’re taking advantage of them.
Home equity loan: This entails setting up a line of credit based on the equity you’ve built up in your home. Your monthly payment increases the more of the line of credit you use. As with a second mortgage, a bank will foreclose if you don’t make regular payments.
Loans: Getting a loan to pay for startup expenses provides up-front cash in exchange for your commitment to make partial monthly payments until the debt is paid off. Business loans are harder to get for startups but, unlike personal debts, they protect your personal assets.
Credit cards: Most credit cards enable you to take cash advances, but credit cards can also be used to pay for most startup equipment and services as well. Because credit card interest rates are high, this is one of the most expensive ways to finance a company and should be a last resort.
Investors: Wealthy people who see your business’s potential may be willing to give you money in exchange for part ownership in the company. Unlike all the previous options, which are debt funding, this one requires that you give up some of the control.

Pros and Cons of Various Funding Sources

The table below shows some of the pros and cons of using each of the main financing options.

Source	Pros	Cons
Personal savings	You maintain control of your company and how you run it	You put your financial future at risk; if the business fails, your money is gone
Second mortgage	You maintain control of your company without touching your cash and other investments	You put your home at risk by increasing the monthly payment you need to make each month to keep it
Family and friends	Less of your money is at risk	If the business fails, your relationships with the people closest to you could go sour
Home equity loan	You maintain control of the company and can tap a cash source as you need it	You’re putting a personal asset at risk; your home can be repossessed if you don’t pay it off in a timely manner
Credit cards	You maintain control of the company and preserve your cash and investments	The interest rate you’ll pay for the funds you use will be higher than for other funding sources
Loans	You maintain control of the company and can pay off your debt over an extended period of time	Business loans are hard for startups to qualify for, which is why many owners rely on home equity loans and other sources
Investors	Less of your money is at risk and with additional capital, your chances for growth and success are greater	You give up some decision-making power and ownership

Strategies for Reducing Funding Needs

There are several ways to reduce your startup expenses and limit the need for additional funding at the outset.

Leasing: Ask your sales rep or a commercial leasing company about signing a lease, which requires monthly payments, instead of a purchase agreement, which requires cash up front.
Sharing resources: If you need a copier, for instance, rather than buy one yourself, look for a nearby company that will let you share theirs when you need it.
Performance-based expansion: Tie specific acquisitions or investments to the achievement of key milestones, such as certain sales levels or a specific number of new customers. Spend money only when you have money coming in to cover it.
Negotiating with suppliers: Ask suppliers what kinds of payment terms they can offer you, such as deferred billing or payments over several months.
Requiring deposits from customers: To get cash flowing more quickly into the business, many companies require an up-front deposit for products and services, especially if the product must be ordered in advance or services will be provided over an extended period of time.