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When you work for yourself, you know cash is critical to the short- and long-term success of your business. As an entrepreneur, being financially “literate” includes understanding how much money you need to get your business off the ground, as well as to build and grow it. But for many of us, finding and securing those precious funds is overwhelming and stressful. Even worse? You can spend so much time and energy figuring out how to raise money that it takes away from the joy of actually running your business.
The good news is there are multiple funding options for you to consider. Before you start trying to secure financing or raise money, you need to know exactly how much you need today -- and how much you think you’ll need in the future.
Understand your needs
If you’ve already developed a business plan (if you haven’t, you probably should), you’ll have a solid understanding of how much money you need to get your business up and running and to keep it going. Here are six questions you’ll be glad you answered before you start the hunt for funding.
- The stage of your company. Are you a startup or are you looking to grow an established business?
- The size of the market you're targeting. Are you tackling a billion-dollar industry or honing in on a small niche market?
- The potential of your offering. Does your product or service address a viable need in a particular market?
- How fast you want to grow. Do you want to scale your business lightning-fast or grow at a slower pace?
- How do you plan to spend the money? How much money do you absolutely need in order to achieve your goals? When will you reach profitability? Let yourself dream big, but don’t forget to think in practical terms, too.
- How do you define the Main Goal for your business? Developing a clear and clearly articulated three-year vision for your business can help you choose the best funding option to meet your goals.
Get ready
Do your homework upfront to make navigating different funding options a whole lot easier. Here’s a three-item checklist to help you get ready:
- Estimate the costs associated with what you’re trying to get done. How much money is required at this stage of your business?
- Create a profit and loss statement for the year. Estimate revenue by doing a profit and loss (P&L) statement and monthly cash flow analysis. Then, use this information to project how the next year or following years will look.
- Know exactly when you'll break even. Once you've done your cash flow analysis, you'll know when you will break even and how much money you need to sustain your business until you get to that point.
Click here for three worksheets (net income statement, balance sheet and cash flow statement) to help you get an accurate picture of your business finances.
Explore your options
Now you’re ready to think about specific funding options. As you do, here’s something important to keep in mind: Stick to what is the most natural fit for you and your business.
Ask yourself:
- How much money do you need?
- How long do you need it for?
- What’s your strategy for paying it back (be as detailed as possible)?
- How much control do you want to keep in your business?
- If you’re willing to sell a portion of your business to get this money, how much would you let go?
Your answers to these questions may make it easier for you to decide how to secure money or investments. Below are seven funding options to consider, with some of the key pros and cons explained.
Loans. As a small business owner, you may be able to borrow money for a period of time to help you get things off the ground or take your business to the next level. There are many different kinds of loans, payback terms and interest rates, so make sure you’re clear on all the details when you do your research. Offers may be based on factors such as your credit score, the amount you want to borrow, how long you've been in business, how long you've been profitable and if you have outstanding invoices. If your business is brand new, you may be required to provide a personal guarantee, too.
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PROS |
CONS |
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Maintain ownership of your business. The lender isn’t interested in ownership of or having a say in the way you run your business |
Repayment & cash flow. You must pay back all the money plus interest, and you need cash on hand to make monthly payments |
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Tax deduction. It’s possible to deduct payments on principal and/or interest from your business income taxes |
It can cost you. You may have to provide a personal guarantee, which could mean putting your home or collateral at risk |
Equity financing. Equity financing is a method of financing by which a company issues shares of stock and receives money in return. Equity investments can come from friends and family members, angel investors, venture capitalists (VCs), private equity firms or through online public offerings. If you eventually want to scale big, this might be a good option to consider.
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PROS |
CONS |
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Less risk & no monthly payments. Equity is less risky than taking out a loan because there’s nothing to pay back. You’ve got cash on hand but also may have to soothe upset investors if things don’t go as planned |
Giving up ownership & control of your company. Others will own part of your business and may expect to be involved in decision-making |
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Business expertise & connections. Angels and VCs can provide guidance and counsel as well as connections within industries |
Time & effort. Finding the right investors can be time consuming and require a lot of emotional effort |
Friends and family. This option can make some people a bit uncomfortable, but if you're in the earliest stages of launching a new business, it might make sense to take out a loan from a friend or family member. Whatever you choose to do, remember this: Everything should be recorded in writing with a legal document.
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PROS |
CONS |
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It’s about love. Friends and family are more likely to be motivated by their love for you than making a profit. They might finance you when other options aren’t available |
Awkwardness. Money doesn’t get more personal than this, so think carefully about what would happen to the relationship if your business falters and investments are lost |
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Greater flexibility. Rates and terms can be lower or more flexible than through other financing channels |
Emotions. If you can’t face your friends or family after losing their money, don’t take it |
QB Community member Adam Wegener turned to friends and family to get his Trash Amps business off the ground.
Government small business grants. The U.S. federal government offers some grants to small business owners but often they are designated for very specific purposes, like research or for creating a new business in a rural area. If you think your business might fall into one of the qualifying categories, head to Grants.gov and see what's available.
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PROS |
CONS |
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Free money. Grants do not require repayment |
Restrictive with strings attached. Government grants are designated for specific purposes, have strict eligibility requirements and require regular progress reports |
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Lots of options. The key is finding which grants you qualify for and then doing the work to apply for them |
Time-consuming & competitive. Expect long hours of detailed work competing for highly sought-after dollars |
Competitions. If you're game for getting on stage and presenting your ideas, entering a small business competition might be the way to go! Participating in startup competitions that provide anything from seed funding to mentorship opportunities can force you to think critically about every aspect of your business — and they help you practice perfecting your pitch!
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PROS |
CONS |
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Free money. You win prize money, investment capital or in-kind rewards |
Time & effort. Taking part in competitions requires a lot of time and effort for a predictably low success rate |
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Practice, reflection & advice. Put your best foot forward, practice your business pitch and get advice about your business through the competition process |
Losing isn’t any fun. True, but we learn more from failure than from success. Simply having the experience of trying is worth a lot! |
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Bragging rights & connections. Winning, is, well, awesome! You can leverage your win via marketing, and the connections you make will remain valuable over time |
Can your self-esteem survive? It takes determination and conviction to put your business idea out to the world after it’s been rejected. |
QB Community member Precious Williams scored big when she entered 14 pitch competitions -- and won 13.
Crowdfunding. Many use sites like Kickstarter or Indiegogo to collect small contributions from a large number of people. Successful crowdfunding often means you need to tell a compelling story online if you want to reach as many people as possible. Having a dynamic video, an emotionally compelling story or a viral (we hope!) multimedia marketing campaign will help, big time.
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PROS |
CONS |
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Money is debt- and equity-free. You don’t have to pay interest or give up a piece of your company. Often you have the cash in hand before you make your product |
You may fail. Sadly, the odds are stacked against you. Kickstarter success rate for many small business categories is <30% |
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Your product is validated. Successful campaigns prove there’s an interest in and a market for your product |
It takes time, effort and some money. Creative crowdfunding campaigns do best. The popularity of CF means it takes more investment on your part to stand out in the “crowd” |
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Engaged customers. Early adopters are more likely to give feedback and forgive rookie mistakes and imperfections |
Unanticipated costs. Rewards for investors are a part of the crowdfunding landscape, so make sure you budget for those costs! |
QB Community member Danielle Vincent has run several successful crowdfunding campaigns for her business, Outlaw Soaps.
Bootstrapping. Bootstrapping means you’re starting your business with very little capital coming from outside your own resources. You attempt to build your business using your personal finances, line(s) of credit and from reinvesting the operating revenues of your business right back into it.
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PROS |
CONS |
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It’s up to you and your credit. No one else is involved when you “fund” your business growth |
Little wiggle room. There’s not much room for errors or accidents when you’re self-funded |
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Organic growth. Reinvesting profits straight into operations makes for a natural, manageable growth lifecycle |
Bad credit potential & lots of interest. Borrowing from credit cards or taking out lines of credit could mean you end up paying a lot of interest if you’re unable to pay off balances regularly |
QB Community member Christina Stembel launched Farmgirl Flowers with 49K of her own hard-saved money.
The bottom line when you're on a mission to find financing? As you evaluate and pursue funding, you’ll need patience, persistence and perseverance, plus an eye for all the practical and financial nitty-gritty. It’s not easy, but in the long run, it’s worth it!
Expert insight:
“I recommend heading to your local bank if you need a business loan because that local connection is key to building trust. If they know you and see your business in action, they’ll feel more comfortable about your ability to pay off that loan.” — Julie Gordon White, owner of The Well
QB Community wisdom:
“When you ask people for money, you’re using your social credibility to benefit your business. I think the only ethical way to do this is to guarantee you’ll honor the promises you make to your investors. If your investors want you to get your business up and running, you have to get your business up and running. If you’re crowdfunding so you can write and publish a book, then you must write and publish that book. People contribute to crowdfunding campaigns for lots of reasons, but here’s what everyone has in common: They all want you, your product or your business to succeed.”— Danielle Vincent on crowdfunding for her business, Outlaw Soaps
Here are more links to help you boost your financial literacy:
- Tool Kit: 7 Key Financial Equations
- 22 Financial Terms Every Business Owner Should Know
- Financial Literacy Basics When You’re Planning for Retirement
Bookmark this page so you can find all our financial literacy articles in one convenient place!
Before you go
QB Community members, which funding options have you pursued and why? Would you recommend that route to your fellow entrepreneurs?
