So which one is it? “Money is the root of all evil,” or “Money makes the world go ‘round”? While there may never be a clear-cut answer, what is clear is that money takes the starring role in our everyday lives. Think about it. From exchanging money to provide food for our dinner tables to finding the venture capital for that gnawing idea for a new business, money is a necessity.
Which begs the question, how DO you start? You may have a great idea for a business, but without personal capital, what are the chances of success?
But let’s back up. It’s important to FIRST explore the “why”. Why are you starting a business? What is the driving force? According to Steve Jobs, it must be about more than just the money. He once heard a phrase given by SteelHouse Co-founder and CEO Mark Douglas and it stuck: “Money doesn’t lead to happiness, but happiness can lead to money.” Jobs was fortunate financially, yes, but he was motivated by the much stronger desire to impact the world. In his own words, “I want to put a ding in the universe.” I think he’s done that and more, don’t you?
By the world’s definition, a company is “successful” when its profits exceed losses on its annual report. But every company started somewhere, right? Even Steve Jobs’ journey to success started penniless in his Los Altos, CA garage, proving once again that you don’t necessarily need a lot of money in order to start a successful business.
Beyond the “why”, is the “how”. First off, it’s important to sit down and define just exactly how much money you will need to start. According to Jayson Demers, writer and founder/CEO of AudienceBloom, ask yourself the following questions:
*What licenses or permits will I need? *What supplies or raw materials will I need and what do they cost? *Will I need a designated office space? *Will I need to subscribe to any monthly memberships or subscriptions? *Including marketing cost, what are my operating expenses? *What are my legal fees and will I need them? *What will I pay employees and/or contractors?
Entrepreneur offers a handy startup cost calculator if you still need added verification.
Once you’ve decided on the amount you will need, you then need to figure out just how exactly you’ll get that money. With numerous financing options out there, Christopher Freeburn of Money Crashers suggests a few. Read through the list and determine what might be a good fit for you.:
Self-Financing: Options here include tapping into your personal savings, selling personal assets, taking out a bank loan, using credit cards, borrowing against your home or cashing out a portion of your retirement. None of these are the optimal choice and nearly half are rather risky and may cost you some hefty penalties should your business not do as well as planned. Research each option and read all the small print if you decide to take this route.
Friends and Family: A 2015 Pepperdime survey found that 68% of small businesses were funded initially by the owner’s friends and family. This option, too, generates its own set of risks. If your business fails, your relationships could suffer. Make sure, prior to the loan agreement, that there is a clear understanding on both sides, on the terms of the agreement.
- Small Business Administration (SBA) Loans The SBA loan programs, offered through a variety of qualifying banks, credit unions and nonprofit lenders, were created by Congress in 1953. Despite the lingering effects of economic recession, SBA reports “unprecedented growth”, jumping 12% from 2013 to 2014. Contact a qualifying lender to determine your options with SBA loans.
Venture Capital: Firms make direct investment into your company in exchange for equity stakes in the business. The tough part is convincing these firms you have potential to make a decent amount of money. Many VC firms receive up to 1000 proposals a year and, according to USA TODAY business columnist Steven D. Strauss, they will only invest in companies that require $250,000 to start and show potential for explosive growth. Sell yourself and this could be a great option.
Angel Investors: Perhaps you know of someone who has been successful in a particular field, looking to invest in a startup company in their field, or similar, in exchange for equity stake. The advantage to angel investors is often these companies will provide guidance as you gain momentum. Angel investors can be tricky to find, as many prefer to keep a low profile but through proper networking, they can be found. They typically provide investments in one to three deals per year, averaging between $25,000 and $100,000 for each startup cost.
Crowdfunding: This is online donations received through friends, acquaintances or anyone who believes in the pitch you provide. Kickstarter is a popular website that has successfully funded over 100,000 projects and helped raise nearly $3M for those projects. The key is to make a good pitch, which usually includes something for the donor (a T-shirt for example).
Peer-to-Peer Loans (P2P): This is borrowing money without going through a bank or investment company. These types of loans are similar to a conventional loan in many ways, but have added advantages, including lower interest rates, fees and greater flexibility,. Popular P2P platforms are Lending Club and Prosper.
Incubators: “Business incubators are run by venture capital firms, government agencies, and universities with the goal of nurturing new business through their earliest stages by providing marketing, networking, infrastructure, and financing assistance.” You will need to go through a lengthy application process, but if you provide a strong likelihood of business success, this could be a great option. A list of U.S. business incubators can be found at National Business Incubator Association.
Given all the options listed, my hope is to provide you with just that: Hope.
Starting a business is scary, frustrating and risky. It is also exciting, fun and full of potential. On the tough days, remember your “why”. In fact, there needs to be a correction to the quote that I started with. Money isn’t the root of all evil. The correct reference is “the LOVE of money is the root of all evil” (Timothy 6:10). Make your purpose in this journey about more than just money and you’ll find your journey to be that much more enjoyable.
Let me Know: What is your “Why?” How did you finance your startup?