Financing your business

• Should you finance your business with your own money? 

• How much money will you need to build the business?

• What about loans and venture capital investors? How do you do that?

• What about Small Business Administration loans?

• How long do I need to plan for before my business is profitable? 

Should you finance your business with your own money?

If possible, it’s a great idea to finance the business with your own money because you won’t have to give away any portion of the business as equity (as you would with an investor) or you won’t have to pay back the money if it’s a loan. 

This is a big topic, and we won’t cover it all here, but for new founders, it takes a lot of pressure and complication away if you can risk your own money.

Some businesses can’t be built with your own money and you may need investors. Then there’s the question of whether they are friends and family, or professional venture capitalists.

Typically I don’t like to recommend loans because there’s nothing worse than having to close your business because it didn’t work, and you owe a bunch of loan money which could take years to pay off.

How much money will you need to build the business?

Depends on a lot of things obviously. If you’re a first time entrepreneur, a lot of people in your shoes start their business with a few thousand dollars. Anywhere from $2K to $10K can start a lot businesses. For a lot of people that’s an amount they are willing to risk. 

I would never suggest that you use your life savings or risk a huge amount of money, unless you have to or are absolutely sure your business will work well. Basically, don’t risk your life savings.

Be sure to use a spreadsheet to guesstimate your startup costs, and be sure to have a sizable budget for marketing. A lot of new founders forget to budget for the marketing phase, which can easily be 30-50% of your total startup budget.

What about loans and venture capital investors? How do you do that?

As I mentioned above, I don’t recommend loans because a lot of first time businesses don’t work out and I hate to see a founder with a dead business that didn’t work, AND a hefty loan to pay back. I really like to try to start selling product very quickly to make sure that you can sell it and there’s a market, and use that early profit to continue to grow the business, and so on.

Venture capital, crowdfunding, and friends and family capital are the other three main non-loan options. 

A lot of people want to try venture capital, and you will need a great pitch deck to raise capital this way. You’ll need to practice your pitch and talk to a lot of people probably. Consider joining a startup incubator. 

Incubators are groups of startup businesses that receive various kinds of support from seasoned mentors, and belonging to an incubator can really help you find VCs to pitch to. Usually in incubator takes a percentage of your equity in exchange for helping you to grow in the early stages.

What about Small Business Administration loans?

Small Business Administration loans are not easy to get. A lot of people consider them among the harder loans to get. 

They often require more documentation and a longer application process than other loans. You can read a lot more on SBA loans here.

How long do I need to plan for before my business is profitable? 

Again, this is highly dependent on the business, but for most businesses, you should expect to see some profit the first few months. This assumes you’re not paying yourself yet. 

I find a lot of new founders think that they will need to pour money into the business for about a year or so before it shows a profit. This is not true and I think a year without a profit is a long time – too long!

Do whatever you can to force yourself to create a profit within the first few months. Granted, if you have a lot of inventory, that might cause your Profit and Loss or your Balance Sheet to not look profitable, but I mean that you should be able to sell your service or your product for more than you paid for it.

If a business is not showing a minimal profit (not including the founder’s salary) after 6 months, generally that’s a sign that the business has serious problems.