Step 1: Identify the Need
Determine your funding needs by estimating the related costs for starting up and continuing to operate. Estimate revenue as well. Do a profit and loss statement and monthly cash-flow analysis for the first year (if you’re not sure how to do this, check out our free cash-flow statement template and guide). With this information, project how your next quarter and year will look. When will you break even? This analysis will highlight the period for which you’ll need outside financing.
After you’ve done your cash flow analysis, you’ll know when you will break even and how much money you’ll need to sustain the company until then.
Step 2: Know Your Options
Even if you don’t have any collateral, poor or no credit score, and no cash flow, there are options. Financing differs dramatically based on the size of your industry, the potential of your business idea and your abilities. Your networks will ultimately help you determine what financing options you have available.
You have many options for financing your company, including funding it from your savings. If you’re a small business needing $5,000, an organization that grants microloans (like Kiva, for example) is a great choice. If you’re a high-growth company needing hundreds of thousands of dollars, angel investors may be the solution. If you want to pre-invoice your product, rewards-based crowdfunding could be your ticket.
Step 3: Deconstruct Your Needs
Be dogged in evaluating what you need and why. The reasons you need the money will impact what type of financing is right for your company.
Your options will vary by many factors, including:
- The stage of your company — Are you a startup or have you been around for a bit?
- The size of the market you are targeting — Is it a billion-dollar-plus industry or is it much smaller?
- The potential of your offering — Does the product address a need in a big or a small market?
- How fast you want to grow — Do you want to scale your business really quickly or grow gradually?
- How much money you need — How much will be needed to scale? When will you reach profitability?
- What you want to use the money for — Do you need money to start your business, provide working capital, grow, etc.?
If you’re a fashion designer, for example, you might need money to hire others to help, increase your marketing spend, improve the technology you use or move into a larger space. Any funding source will want to know the answers to these questions before they buy in.