Step 3 – Fund Your Business
It costs money to start a business. Funding your business is one of the first — and most important — financial choices most business owners make. How you choose to fund your business could affect how you structure and run your business.
The first step is to determine how much funding you will need. Most businesses fall into one of three categories: brick-and-mortar businesses, online businesses, and service providers. You’ll face different startup expenses depending on your business type.
Typical Startup Costs
There are common startup costs you’re likely to have no matter what. Look through this list, and make sure to add any other expenses that are unique to your business.
- Advertising and marketing
- Employee salaries
- Equipment and supplies
- Lawyer and accountant
- Licenses and permits
- Making a website
- Market research
- Office space
- Printed marketing materials
Once you have your list of expenses, you can estimate how much they’ll actually cost. This process will be different for each expense you have.
Some expenses will have well-defined costs; permits and licenses tend to have clear, published costs. You might have to estimate other costs that are less certain, like employee salaries. Look online and talk directly to mentors, vendors, and service providers to see what similar companies pay for expenses.
One-time Expenses & Monthly Expenses
Once you’ve identified your business expenses and how much they’ll cost, you should organize your expenses into one-time expenses and monthly expenses. Add up your one-time and monthly expenses to get a good picture of how much capital you’ll need and when you’ll need it.
One-time expenses are the initial costs needed to start the business. Buying major equipment, hiring a logo designer, and paying for permits, licenses, and fees are generally considered to be one-time expenses. You can typically deduct one-time expenses for tax purposes, which can save you money on the amount of taxes you’ll owe. Make sure to keep track of your expenses and talk to your accountant when it’s time to file your taxes.
Monthly expenses typically include things like salaries, rent, and utility bills. You’ll want to count at least one year of monthly expenses but counting five years is ideal.
Calculate your startup costs by using this fillable spreadsheet (PDF).
Types of Start-Up Funding
- Venture Capital from Investors
- Small Business Loan
- SBA-Guaranteed Loans
- Small Business Investment Company
- Small Business Innovation Research
- Small Business Technology Transfer
Self-funding lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends for capital, using your savings accounts, or even tapping into your 401k.
With self-funding, you retain complete control over the business, but you also take on all the risk yourself. Be careful not to spend more than you can afford and be especially careful if you choose to use tap into retirement accounts early. You might face expensive fees or penalties or damage your ability to retire on time — so you should check with your plan’s administrator and a personal financial advisor first.
Venture Capital from Investors
Investors can give you funding to start your business in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in the company.
Venture capital differs from traditional financing in a number of important ways. Venture capital typically:
- Focuses high-growth companies
- Has a longer investment horizon than traditional financing
- Invests capital in return for equity, rather than debt (it’s not a loan)
- Takes higher risks in exchange for potential higher returns
Almost all venture capitalists will, at a minimum, want a seat on the board of directors. So be prepared to give up some portion of both control and ownership of your company in exchange for funding.
Crowdfunding raises funds for a business from a large number of people, called crowdfunders. Crowdfunders aren’t technically investors, because they don’t receive a share of ownership in the business and don’t expect a financial return on their money.
Instead, crowdfunders expect to get a “gift” from your company as thanks for their contribution. Often, that gift is the product you plan to sell or other special perks, like meeting the business owner or getting their name in the credits. This makes crowdfunding a popular option for people who want to produce creative works (like a documentary), or a physical product (like a high-tech cooler).
Crowdfunding is also popular because it’s very low risk for business owners. Not only do you get to retain full control of your company, but if your plan fails, you’re typically under no obligation to repay your crowdfunders. Every crowdfunding platform is different, so make sure to read the fine print and understand your full financial and legal obligations.
Small Business Loan
If you want to retain complete control of your business, but don’t have enough funds to start, consider a small business loan.
To increase your chances of securing a loan, you should have a business plan, expense sheet, and financial projections for the next five years. These tools will give you an idea of how much you'll need to ask for and will help the bank know they’re making a smart choice by giving you a loan.
Once you have your materials ready, contact banks and credit unions to request a loan. You’ll want to compare offers to get the best possible terms for your loan.
MoFi offers small business loans to businesses in Montana and Idaho
Small Business Administration (SBA) Guaranteed Loans
If you have trouble getting a traditional business loan, you should look into SBA-guaranteed loans. When a bank thinks your business is too risky to lend money to, the SBA can agree to guarantee your loan. That way, the bank has less risk and is more willing to give your business a loan. Use Lender Match to find lenders who offer SBA-guaranteed loans.
Small Business Investment Company (SBIC)
SBICs are privately owned and managed investment funds licensed and regulated by the Small Business Administration. They use their own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses. Learn more about SBICs to see if your business might qualify.
Small Business Innovation Research (SBIR) Program
This program encourages small businesses to engage in federal research and development that has the potential for commercialization. Find out if the SBIR’s competitive awards-based program makes sense for you.
Small Business Technology Transfer (STTR) Program
This program offers funding opportunities in the federal innovation research and development arena. Small businesses who qualify for this program work with nonprofit research institutions in the early and intermediate stages of starting up. Find out if the STTR program makes sense for your business.