Where can I get the money to start a business? Most new ventures require capital to purchase inventory, secure a physical location, and begin some modest marketing efforts. Often, new business owners must make do with whatever sources of financing are available to them, including their own funds. When entrepreneurs start a business with little capital, they are said to be using bootstrap financing. This includes using your own money, borrowing funds from family and friends, and possibly trading services and products with vendors or clients. Friends and family are generally go-to financing options for new business owners because, unlike banks, family and friends often do not require high rates of return on the money they have invested or demand the business turn a quick profit.

However, it is important when borrowing from friends and family that you treat them as professionally as possible. Make sure you give them documents that indicate how you intend to pay them back and outline a contingency plan if things go wrong. In addition, you should inform them up front and during the project of any risks related to the venture. Other means of bootstrap financing include using trade credit, factoring, and leasing. We will discuss these options in Chapter 15.

Is it reasonable to use crowdfunding sites to raise capital? Sites like Kickstarter and Indiegogo have popularized a new type of start-up funding known as crowdfunding. Entrepreneurs put together a detailed explanation of their projects or businesses on these sites and ask for funding. People who fund projects on these sites typically donate small amounts of money and are offered free products from the startups they contribute to—perhaps the chance to purchase a product in a special edition or color or meet with the product’s designer. People supporting a Kickstarter business do not own any part of the new business and are not guaranteed that it will be successful—they are simply making a donation.

Crowdfunding might sound like a poor way to launch a product, but that’s not necessarily the case. There are many amazing stories of super successfully crowdfunded projects. Pebble Watch was one of the first projects with extraordinary funding success. The developer of the watch was hoping to raise $100,000 in one month on Kickstarter and ended up raising more than $10 million. More recently, the Coolest Cooler reached its goal in less than 36 hours, and ultimately received more than $13 million in pledges. Crowdfunding will be discussed in more detail in Chapter 15 as well.

Should I use credit cards to finance my business? Credit cards offer a convenient way to obtain funds quickly, especially with some of the 0 percent financing options available. If used wisely, a credit card can be a convenient way to finance a business’s short-term needs but only if you can pay the balance off completely every month. If not, the interest charged on the unpaid balances can grow quickly because the interest rates on credit cards are extremely high compared to other types of financing. Over time, you are paying interest on any unpaid balances as well as interest on any carryover interest, which quickly can become a huge financial burden.

What if I need more money than what I can provide myself? For larger amounts, new business owners sometimes borrow against their own assets, such as the equity in their homes or against their retirement accounts. However, this is a risky practice because the consequences of the business failing are personally devastating. Bailing out a failing business with your life savings or equity in your home has caused many a person to lose both.

If you are purchasing an existing business or a franchise, banks and savings and loans will often offer loans to help you buy the business, equipment, and machinery and lines of credit (sources of credit that can be drawn on at the borrower’s discretion) to help you make your payroll during slower periods. Roughly half of all small businesses use bank loans and lines of credit as part of their financing strategies.

Can I apply for grants to help start my business? Grants are financial awards offered by federal and state governments and some private organizations. Although grants do not need to be repaid, the application process is quite long and includes considerable amounts of paperwork. The biggest hurdle in applying for a grant is writing the proposal. Make sure you understand the grant-writing procedure because many a good submission has not been funded because of an oversight in the grant application. Depending on the nature of your business, federal grants are usually not available, but state governments typically offer grants to small businesses that are in industries that the states are trying to nurture to expand in their economies. Make sure, however, you read through the entire grant application and understand any requirements that may be expected of a grant recipient. Failure to comply with grant requirements will generally result in the grant proceeds being converted to a loan, with interest.

What if I need additional sources of funds through investors? There are other sources of funding if you choose not to finance your business with loans or if loans are not an option. For example, businesses can be financed by outside investors, such as angel investors, venture capital, or small business investment companies:

• Angel investors. Angel investors are wealthy individuals who are willing to put up their own money in hopes of a profit return later on. Angel investors fund thousands of small companies each year, with investments that range between $25,000 and $1 million.26 Angel investors often provide funding in the earlier stages of a business and typically have industry experience in the areas in which they are investing and can provide guidance and advice. Unlike venture capitalists (discussed next), angel investors usually do not seek to manage or control the businesses they are investing in. If you don’t personally have any rich friends or connections to rich friends, it is possible to find an angel investor with a simple search on the Internet. Angel Capital Association can help locate regional angel groups. Social networking sites, such as Angel List and Investors’ Circle, match entrepreneurs to investors.

• Venture capitalists. Venture capitalists are the next step in funding a start-up. Venture capital funding is generally sought when the business is more mature and needs large sources of capital to take the business to the next step. Venture capitalists are corporate entities that use funds from other investors and manage that money by investing it in businesses with prospects for high growth. In return for the investments, venture capitalists get some form of equity—a piece of ownership—in the businesses. Venture capitalists are picky about the projects in which they invest because they want to minimize the risk of failure. Generally, the financing they offer is available only to businesses that have been operating for several years and have the potential to become larger, publicly owned, regional or national companies. To protect their investments, venture capitalists sometimes demand to play an active role in the management of the company. So, business owners must be open to the idea of relinquishing control when they seek venture capital funding.

Shark Tank, the ABC reality television show, offers a peek into the venture capital arena. The show features high-profile investors who listen to several new business pitches every week.

• The small business investment company program. If venture capital is not available or suitable, an alternative is a small business investment company (SBIC) program. SBICs are private venture capital firms licensed by the SBA to make equity capital or long-term loans available to small companies. The size of the financing provided by SBICs is generally in the $250,000 to $5 million range.

As mentioned, a downside of using outside investors is that, to protect their investments, these investors often are looking for some controlling or managerial role in the business. However, it is the investor’s level of business acumen that is often necessary to take a business to the next stage of growth, so generally it is a win–win for both owner and investor.