By Dave Evans, SCORE Accredited Business Counselor, Chapter 411, Northeast Massachusetts
How do you find the cash to start up a business? This is THE question most asked by budding entrepreneurs. The reality is that there is no pot of money for new businesses to just dip into to get their business started. No free grants to get your great idea going, no one handing out thousands or millions of dollars to anyone with a pet project.
There is a hierarchy for financing that you need to understand if you want to launch a new business and it begins here:
- FFF (friends, family and fools) …
Since the idea for the business is yours, be prepared to come up with your own cash (savings, investments, sale of asset[s]), money from relatives or from trusting friends. If you don't have enough cash then; find a partner or group of partners to either invest and work with you. Alternatively, locate limited partners who will invest with no control but who will share the profits. There is no one else more closely involved in the idea than you. You take the risk. Start small if you don’t have much cash.
- FUNDING FROM RETAINED EARNINGS …
If you are among the few who actually get a business idea up and off the ground successfully, then wisely put the earnings back into the business. Use that money to grow the business from the earnings. Don’t squander these funds, they are precious because they can be the life blood to make the business bigger and earn even more money; the cash itself is an earning asset.
- BANK LOANS backed by SBA guarantee(s)…
Assuming yours is a U.S. based business with assets in the Continental United States, once your business has proven its ability to earn money consistently, a bank, when supported by a U.S. government guarantee of repayment, will often show interest in providing appropriate loan assistance. As you can see banks are not the first place to go for money. They will, however, take an interest when you have proven your business is viable and profitable. As you can imagine, they want to keep their depositors’ money as safe as possible, they don’t want to take big risks with it.
At this point, most small businesses continue on with a combination of the first three funding sources under-girding them.For fast growing companies
For those businesses that are capable of becoming publicly owned---usually providing products or services with national or world-wide appeal---additional options exist.
- Angel Financing
Fast growing businesses will need lots of cash to afford all their new business activity. These firms often seek ANGEL FINANCING. Angels are folks who can see that they will be able to make a lot of money by either selling the company to a larger firm later on or taking it to the next step, VENTURE CAPITAL (VC). To obtain their investment you have to give up a good part of your ownership to them. They are taking the lion's share of the risk by putting their money into the business. You need to think this through carefully since it is rare to be able to get more then one shot at this. You have to give up a large part of the business to receive the funds and in most cases the angle investor will want to sell the business quickly to make his money back and more.
- Venture Capitalists
Venture Capitalists will only take on business financing if they see that they will be able to take the company PUBLIC. VCs will want to see a seasoned and proven management team in the business. If they don't see all of what they want for staffing, strategy or structure---and, IF they take on the project (a very big IF)---they will make the desired changes and take control of the business operations. At this point many entrepreneurs bow out of their company taking their newly earned assets---usually shares of the now publicly traded stock---with them and start over again with some other business idea.
Financing a start up is not easy and there is little financial easy money to be found. But if you really believe in your idea and are willing to put your money into it, others will come to help.
- Start with a clear plan.
- Know the scope of the real costs to start up and get to profitability.
- Then, get help with the next steps from Score.