Funding a Business
One of the major hurdles in starting a business is often financing. A business can have a sharp business plan and good products, but none of it will matter without proper funding to maintain the business.
To get funding, or capital, for a new business there are multiple resources, but each has limits. You should also remember good business practices include honoring debts and meeting obligations to investors.
To determine what the best financing options are for your business, have a detailed financial analysis in your business plan. To learn more about business plans and finances, see Developing a Business Plan and Personal vs. Business Finances.
Financing resources can be grouped into four rankings based on the responsibilities of the business owner.
1. Personal Assets
This is the preferred financing option. The business owner is accountable to him or herself and no profits from the business need to be paid to another person. So if the investment doesn’t show a return, the business owner is the only one out of any money. Remember, do not invest anything you are not willing to lose. It is one thing to lose money or equipment and another to lose your home.
Personal Financing Options:
- Selling investments
- Selling some assets
2. Friends and Family
This option requires paying others from your profits, but it does not hold the rigidity of a professional lender who needs guarantees or collateral. Friends and family already know you and your abilities and can judge for themselves if your business plan is stable. While a friend or relative may be more likely to be sympathetic should your business experience an unavoidable downturn, you should still honor your commitments. You do not want to risk losing friends and alienating relatives.
Things to Remember:
- Do not borrow an amount the person cannot afford to lose.
- Before someone invests, ask them how they would handle a situation where your business does not succeed and you could not pay them back immediately or at all.
- Set clear terms for the loan, and if it is a larger sum, have an attorney draw up a legal agreement. Having things in writing is better than relying on memory to settle any disagreements. Make expectations clear so there is less chance of a disagreement in the future.
3. Equity Finances
These are funds received from people who will be given part ownership in the business in exchange for their help. This option does not necessarily mean the investor will be given portion of the profits, but it does mean the investor will have some control over business decisions. With any arrangement like this, the expectations must be clearly defined to avoid misunderstandings. For example, does a person want to be involved with the day-to-day administrations of the business or does he/she want to be a silent partner with little or no say in how the business is run?
4. Debt Financing
This is traditional lending where the business owner has to apply to a bank or company and qualify for a loan. The business owner then has to pay back the loan plus interest in regular payments
Types of Lenders:
- Financial Institutions – Look for companies and banks with loans specifically designed for small businesses. Organizations or associations for small businesses can be a good place to learn about loan programs in your area.
- Microcredit Organizations – Microfinance is designed to give small loans to those who don’t normally qualify for traditional loans from larger banks. These are common around the world, but are rarer in the U.S. and Canada. Some microcredit organizations focus on loaning to groups of business owners who have limited business experience, education, or collateral. A group works together to pay back loans and supports each other. Groups also meet regularly to discuss their businesses and share their knowledge with each other.
- Organizations that Specifically Lend to People in Your Situation – These are groups (private or government) that give loans based on specific requirements. For example, a business might receive funding if it promotes local artists or if a single mother is running the business. Sources for this type of funding could include government grants and some microcredit organizations depending on what is available in your area. Other possible factors are income, working in a specialized industry, or living in a particular geographic area.
To learn more about financing in your area, see the Self-Employment Workshop available at LDS Employment Resource Centers and Self-Reliance Centers.