How Do You Finance a Startup Business?
Written by CMG News Contributor, Doug Carleton
Financing a startup business is seldom easy. Most entrepreneurs thinking of starting, or in the earliest stages of a new business, think that banks are the way to finance the business. In reality, the most likely sources are going to be your savings, family, friends, acquaintances, or anyone who might have an interest in seeing your business succeed. Conventional sources of financing are often closed to the startup business particularly because they historically have a high failure rate in the first two years.
Let’s briefly look at some of the possibilities:
Banks. Banks are primarily collateral/cash flow lenders. They are also heavily regulated by the federal and state governments, creating limitations on the types of loans they can make. You also have to be able to demonstrate that you fully understand the risks inherent in what you are about to do, and tell the banker how you are going to deal with them. Bankers know that risks are extremely high for startups and that more of them fail than succeed. So don’t try to fool them. You will lower your credibility and you chance for any financing.
What about SBA loans? SBA doesn't make loans. Only banks and other SBA-approved lenders make loans, using their own credit guidelines, and if the bank approves the loan, the SBA will generally guarantee it. Since SBA guidelines are 75% of the loan amount, some banks will consider an SBA loan to a startup if they can get the guarantee.
Failing any type of bank loan, you may just have to do it yourself. Here are a few options:
Supplier and Vendors: In the current pandemic-induced recession, suppliers and vendors are also suffering. So there may be an opportunity to try something like, "I really want to use your product, but since I'm just starting could you possibly offer 60-day terms for some period?" The supplier needs you and you need their product. They may be some of your best friends.
Leasing: If it can be bought it often can be leased. Leasing generally requires first and last month's payment with regular monthly payments until finished. The benefit is that you only have to use two months of your precious cash.
Tenant Sharing: Look around. There are probably more tenant-sharing arrangements than you had ever paid much attention to. Let's say an opportunity comes up to acquire a really desirable space for your business, but it's too big to afford alone. Another tenant in a complimentary business to share the rent might just make it possible.
Credit Cards: Credit cards are one of the most common tools to help a business get off the ground. The one thing absolutely most critical when using a credit card is to pay every month. Credit cards are one of the fastest ways to build up a good credit score. But the fastest way to ruin your credit score is to miss payments, and the results of having a bad credit score can be felt for a long time.
Crowdfunding: Many startups use some form of crowdfunding to get started. There is more information on the internet than you would ever probably want to know. The best places to start are Indiegogo and Kickstarter.
There are still other ways to finance startups, this has just been a quick highlight film. Probably two of the most important things to remember are that it is never easy and it usually takes longer than you want.
This blog entry is a slightly edited excerpt from Doug Carleton's 'The Daily Life Of A Small Business Owner' series. Doug was a mentor with SCORE, Startup Virginia, and Lighthouse Labs, and has 25+ years of experience in small business finance including 12 years in SBA lending. To contact Doug directly, please email him at firstname.lastname@example.org.