Running A Business

Worst and Best Ideas for Financing a Startup

Dec 07, 2019 • 7 min read
Small business owner opening his first business
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      How do you go from a “million-dollar idea” to an operational business? To launch your business, you’ll need a combination of elbow grease, resiliency, and funding. Whether you need to build a website, buy inventory, or hire staff, every startup requires some amount of capital.

      Maybe you’ve just started your business, or maybe you’ve been a weekend warrior for years and are finally ready to go full-time. We’ve put together a list of ways to fund your startup—from worst to best. 

      Worst Idea: Selling Organs

      This idea is both terrible and illegal. Don’t finance your startup this way. 

      Bad Idea: Borrowing Money from Your Estranged Family

      When starting a business, many entrepreneurs begin by seeking financing from family members. For many, borrowing capital from family provides an opportunity to skirt the complications that can come from traditional bank loans. Relying on family members to finance your American Dream comes with its own set of complications, like putting a strain on relationships. If you’re already on bad terms with your family, this approach is a recipe for disaster. 

      Wild Card Idea: Borrowing Money from Close Family Members

      This option is slightly better than borrowing money from your estranged family members, but it has the potential to go so much worse. When starting a business, family can be your friendliest source of funding. Unlike acquiring funding from a lender, your family likely isn’t going to ask you for a credit check or at least 6 months in business before investing. Your business plan and passion may be enough for them to sign on the dotted line. 

      The Potential for Success with Family-Funded Businesses

      Funding from family can be great. It often means bigger buy-in from your family members, which can be ideal if you’re seeking their involvement. According to the US Census Bureau, 90% of American businesses are family-owned. If your family has a solid working relationship, the success of your business has the potential to generate wealth—not just for you but for the whole family—and strengthen already tight-knit family bonds. 

      The Potential Nightmare of Family-Funded Businesses

      Communication, a core pillar of all healthy relationships, becomes even more vital when money is involved. Before you accept capital from your family members, you need to answer the following questions. 

      Do your family-member-investors have the capital to lose? Nobody wants to talk about the potential for failure when starting a business, but if you’re getting into business with family, you have to. Sometimes small businesses fail. If your family were to lose the money they invested in your company, would that substantially affect their lives? When you’re just starting out, you have enough on your plate. You don’t need the added pressure of safekeeping your parents’ retirement fund while trying to change the world. 

      That covers if things don’t work out. If your business is a smashing success, what happens? It’s just as important—if not more so—to plan for the success of your business when you’re relying on family funding. Don’t brush off tough conversations with statements like “We’re family.” Many family members seem chill to sit in the background until the business succeeds, at which point, they are more interested in active involvement with the company. When accepting family funding, it is essential that you not only have these discussions but that you put them down in writing.

      Good Idea: Self-Funding

      Many business owners rely on their savings to finance at least part of their business. Self-funding can demonstrate to future investors that you are committed enough to your business to put your money where your mouth is. Similar to seeking funding from family, the prudence of self-funding depends on the amount you’re self-funding relevant to your net worth.

      If you’re fortunate enough to have extra capital saved in addition to a personal emergency fund and your retirement savings, then self-funding can be an effective way to launch your business. If self-funding means tapping into your 401(k) and draining your emergency fund, don’t do it. The financial safety net you’ve built for yourself becomes even more important once you strike out on your own.

      If you’re not in a place to self-fund under those parameters, worry not. There are other, more stable ways to finance your business. 

      Great (But Inaccessible) Idea: Angel Investors

      Angel investors play an integral role in the mythology of the American startup. You have a great idea, and then you find an affluent individual or venture capitalist to invest in your company—in exchange for equity or convertible debt. This is the story peddled to us from Silicon Valley and put on our screens with shows like Shark Tank

      Angel investors are great if you can get them. The truth is that most people won’t have access to this form of capital. In 2017, venture capitalists funded startups with an industry total of $85 billion. Women only received 2.2%, and women of color received less than 1% of that total. The truth is that venture capital disproportionately rewards entrepreneurs that are white and male, and even then, getting funded is about as easy as finding a needle in a haystack. 

      Best Idea: Business Credit Cards

      Business credit cards should be a part of the funding plan for any startup because of the accessible, flexible capital they offer. If you’re surprised to read, “Credit card debt can be good for business,” then you may be conflating business and consumer credit cards. 

      Leveraging debt through business credit cards differs from consumer credit card debt. We’ve all either heard or lived horror stories of college students racking up credit card debt that can follow them for years. With consumer debt, you’re borrowing money to purchase items often for your personal enjoyment. If you don’t have the money to repay, then you’re faced with a monthly balance subject to high interest rates. 

      The use of business credit cards follows different financial principles. We’re all familiar with the phrase, “sometimes you have to spend money to make money.” It’s often the case that building a business requires an investment up front. Whether you need to find a way to finance a tractor or you need to purchase office supplies, business credit cards can help you do that. If you’re planning a large purchase (like the aforementioned tractor) and you’re planning to pay it off within 12 months, you may want to look into cards with a 0% introductory APR.

      Credit cards offer the added benefit of perks for your necessary spending. Whether you’re interested in a card with cash back rewards or points you can put toward perks like travel, there’s a business credit card that meets your needs. 

      If all that wasn’t enough to convince you that you should absolutely have a business credit card as a part of your startup arsenal, consider the ease it can bring to your bookkeeping. With a business credit card, you can have all of your expenses in one place, making them much easier to track. 

      How hard is it to get a business credit card? Business credit cards are awarded based on a business owner’s personal credit history, making them one of the most accessible forms of business financing. 

      Best Idea: Startup Loans

      Best ideas are like best friends—you can have more than one. Startup loans are tailor-made for small businesses in the developmental stages. Startup loans offer the benefits of other types of business loans—up front capital, set terms, clear interest rates—with added accessibility.

      Where other business loans, like SBA loans or equipment financing, rely on key factors like your revenue and time in business, startup loan decisions are made based on your personal credit history. This method allows you to find a happy medium between self-funding and taking out a business loan. You get to vouch for yourself and your business the way you would through self-funding and receive the structured framework of receiving a loan through a lender. Bonus: startup loans will cause no drama at family holiday get-togethers (a benefit only those who have received funding from family members can truly understand). 

      Startup loans contribute to your credit history, which means that if you continue to repay the loan on time, it will help you grow your credit. In turn, this will help your business to qualify for larger sums of money and better terms in the future. 

      About the author
      Mary Kate Miller

      Mary Kate Miller is a writer based in Chicago, IL. She specializes in covering finance (personal and business), investing, and real estate. Her mission in life is to give readers the confidence and the knowledge needed to grow their wealth by making financial topics more accessible. When she's not writing about topics like business loans, you can find her playing armchair financial advisor to the Real Housewives.

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