This mini-series has been walking you through the mental and executable actions in becoming an entrepreneur. Today, we are finally going to talk about part of “how,” as in how to start your business. Specifically, how do I fund my business?
Before I go any further, please go talk to a banker and an attorney. I’m going to speak from my experiences and perspective, but their guidance should be considered the ultimate authority.
That said, how do you get working capital? There are several ways. First and foremost, you need to create a business plan like we discussed last week. No matter if you are 100% self-funded or seeking funding, you need a business plan. The plan is your rationale for the business, the projected expenses, and revenue, etc. This is critical as you will follow this plan as you launch your business and scale it over the next 3 years. Once you have your plan, you can decide which funding path you feel most comfortable with. Here are the most common funding pathways:
- You have savings, a 401K, etc. that you can access. Self-funding is by far the easiest pathway to access working capital. You can pull money out of savings to start your business. You can take your 401K and use that as seed money if you so choose (there are banks that can help you create a C-corp and use this funding without tax implications–but again, talk to a financial representative to learn more).
- You have home equity or other lines of credit you could tap into by refinancing your home or execute a HELOC in order to create capital. If you are fine with a higher monthly mortgage rate and this action is one you are comfortable with, then consider this as an option.
- A bank loan or SBA loan. For small businesses, SBA loans are the most common. Know that they can have higher interest rates, around 5% or more. You must put between 10-20% down, out of your pocket. Last but not least, they will put liens on all of the property you own: cars, homes, land, etc. You will put up a certain percentage, the bank another percentage, and the SBA will cover the bulk of the loan. The SBA doesn’t loan you the money, they simply become a guarantor of the money should you default. Normally they guarantee about 70-80% of your loan. You must have strong credit, around 700 or higher. The assets you have need to be worth enough for the bank to feel comfortable loaning you a reasonably large sum of money. While there are hoops, if you qualify, this is an option.
- Investors. Decide how much money you will need from an investor or investors (use your business plan!) and then decide when you will need it. For example, do you need $100,000 investment in the first year, then you project in year 2 you will need a $500,000 investment to buy property/land and build a building? Decide how many investors you are willing to take on, the percent ownership of the company, and if you want them to b a silent partner or an active partner.
Last but not least, know that you can do a combination of any/all of these pathways. There is no wrong answer, just the one that gets you the money you need, when you need it, in a way that makes you feel most comfortable.
Your challenge today is to decide the pathways of investment you are comfortable with and will pursue.
Note, I never got into the legal creation of an entity, a sales process, or HOW to run a business. These are executable pieces once you have committed to becoming an entrepreneur. Committing is the hardest part and that’s exactly what you just worked through this month! If you have business-specific questions, reach out to me at firstname.lastname@example.org. I’m here to support you!