You’ve come up with a plausible idea for a business. That is great! An idea gets you to the starting gate. However, you get into the race with money. Startup financing is the means to turn that idea into a real business. Thankfully, today there are more sources of startup funding than ever before. While there are traditional financing sources from banks, credit unions, and investors, there are also new twists on startup funding with innovative crowdfunding and angel investors. Here is a look at traditional and creative methods of funding your startup. Major Sources of Startup Funding Overall, most funding for startups falls into one of the four following categories.
  1. Revenue. This is probably the most common method. You sell your product or service, receive money for it, and plow it back into the business to fund growth. It is also called bootstrapping, self-funding, and internal financing.

  2. Equity. This is selling shares in your new venture in exchange for money, services of value to the new business, or work for the venture, called sweat equity.

  3. Debt. Loans fund many startups. They can come from banks, credit unions, friends, family, and private investors.

  4. Grants. This is money that is given to help a business get going, but requires no equity or repayment of the money. Not-for-profit companies receive most grant money, but for-profit entities are often eligible as well.
Specific Types of Funding Here is a quick overview of the most common types of funding methods for startup companies. Crowdfunding. Kickstarter and Indiegogo, among others, have provided robust, innovative ways for startups to raise money. The entrepreneur takes his case directly to the public in a crowdfunding campaign. Angel Investing. Individuals with money and interest in investing in trendy ventures with strong growth potential are called angel investors. The best kind are accredited investors, with a net worth of at least $1 million or an income of $200,000 or more for each of the last two years. They often seek investments as a group. Venture Capital Investing. The entire purpose of venture capital firms is to find promising businesses in their early stages of development who are looking for funding. The money often comes with a formal agreement that covers the timeframe for the firm to begin seeing a return on their investment. Bootstrapping. Some aspiring entrepreneurs also obtain startup funding by self-funding: selling assets, withdrawing savings, borrowing against their home, maxing out credit cards, or tapping into their 401(k) savings. Friends and Family. Loans can often come from the people who know you best and are rooting for you to succeed. Bartering. Exchanging your products or services to other companies to get what you need to grow, whether office supplies, computer repair or expertise. Small Business Grants. These can come from the local, state or federal government as part of an effort to stimulate the economy. Some nonprofits also offer them. Small Business Administration (SBA). The SBA extends small loans and expertise to new businesses. Lines of Credit. Banks and credit unions offer commercial lines of credit that are well-suited for startups. With a line of credit, you only pay interest on the funds you use rather than the entire approved loan amount. Incubators. These can be universities, nonprofits, and companies specializing in this type of work. They provide labs, consulting, office space, marketing advice and sometimes money. Often they require equity in your startup in exchange. Partnership. This involves finding someone who has substantial skills, friends, or money to contribute to your business in exchange for a percentage of it. Major Customer. If your product or service is valuable to a single major customer, it might be willing to give you money for development and startup expenses. In exchange, it will have input and varying amounts of control over your production process. Most new businesses use a mix of sources for startup financing. With the many options available and a commitment to your new business, you have an excellent opportunity to turn your idea into a thriving company.

Sources of Start-Up Funding

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Your business name is usually a customer’s first introduction to you. Make a positive impression by picking a name that attracts attention and trust. It can be a hair-pulling process finding a name that resonates with your intended audience. Here are some tips for choosing a name that does, and once you find it, making it legally yours. Factors To Consider In naming your business, the goal is to find a name that arouses genuinely positive feelings when customers encounter it for the first time. It should be web-friendly and attention-getting too. Be aware of what connotations a potential name evokes. If you have a beach shop selling sports gear, for example, a corporate sounding name is probably not a good match for your company. Choose a name that will look good within a logo, on business cards, stationery and your website header. Image is important for a company, and that starts with the name. Pick a name that expresses the essence of your business, what it does, what it produces, what its purpose is. Express the emotional meaning of the company as well as give people practical information. Try to make the name short. It is easier to remember and fits more artistically on business cards and headers. If you do pick a longer name, be sure to check how it will look when abbreviated. You do not want any acronyms with unforeseen meaning! Should you use your name? This is typical for many new entrepreneurs, but it has limitations if you intend to expand. Down the road, it might make it more challenging in building a brand. If you are having problems coming up with the perfect name, the free website BustAName.com is one option that can help you come up with possibilities. Name Availability Ideally, your name should also be unique to your business. Check to see if a claim for the name exists within your state. However, even if another firm has that name, it is possible you can still use it if you offer an entirely different set of goods or services, and your location is not in the same area. Check with your state’s business filing agency to check if the name is available. Many states let you do this online. Go to the U.S. Patent and Trademark Office online and use the search tool to find out if the name you want, plus variations of it, are already trademarked. You need a name that is free and clear. Of course, a web presence is essential. One of the best things you can do for your company’s future is to find a name that is available as a high-level domain, especially a .com. It is worth reworking the name to find one that is free. You can check the WHOIS database online to find out if the registration status of the name you want. Registering Your New Name To legally claim the name you choose, you need to register it as a “Doing Business As,” or DBA, with your state filing office. This is different from incorporating a business and trademark protection. This only lets the state legal entities know that you are in business and using a name separate from your personal name. Be sure to apply for trademark, protecting the words, symbols, names, and logos that are distinct to your business. One of your company’s biggest assets is your name, so you want to keep it safe. Over the long-term, getting trademark protection is inexpensive at under $300. Lastly, register your domain as soon as you decide. Claim your corresponding social media identity at the same time. At the very least, this should include Facebook and Twitter, but don’t forget about Pinterest, Instagram, YouTube, and Google+ for businesses too.

Naming Your Business

View Resource Naming Your Business
If you are putting together a business plan before approaching lenders, you’ll want to be specific in your calculations about your market share. Figuring it out takes time and research, but is well worth the investment. It helps not just for financing, but also when you make product development, marketing, and manufacturing decisions. Understanding Market Potential The potential of the market rests with what is needed to solve a problem. Listening to music is an excellent example to illustrate how to understand a market’s potential. In this instance, the problem is: how can a music lover listen to their favorite music affordably and conveniently? Through the years, methods have included using Victrola records, long-playing records, singles, cassettes, CDs, MP3s, and products like iPods and Beats headphones. With time, a new technology will become the norm. The “market” isn’t necessarily the product: namely, an iPod or Beats headphones. The market is the music lover. The opportunity depends on how many there are, and how much of the market you can realistically expect to capture. This recurs over and over in every type of market: personal, home, office, agricultural, and industrial. You will not go down the wrong path if you keep your eye on the problem and its solution. You can miscalculate the size of the market if you focus on one type of product and the numbers sold. Do that, and you will miss the wave when new technology comes along, as it always does. Remember, you are sizing the market, not what the product you are selling. Identifying Your Niche and Segment Once you have identified the problem and corresponding solution, you can move on to the next step: defining the market niche you want to serve by identifying your target customer and market segment. For instance, if your overall market is providing customers with pool cleaning supplies and equipment, you can break that down by eliminating people that wouldn’t be interested in your product. That might include homeowners who are too busy, like families where both parents work. Another group to eliminate might be high wealth households that might hire a pool cleaning service to handle the task. Keep trimming. Eventually, you might end up with quite a small market. Many successful businesses appeal to only a small fraction of the market. Estimating Your Market Share Now that you have determined the problem, the solution, and your niche, you can use traditional methods to compute the size of a market. There are multiple approaches to zero in on a good market share estimate, including governmental databases, surveys, industry studies, and competitors. For starters, find out the number of people or businesses that need your product or service. Resources to help you estimate this include the Small Business Administration, industry associations, and statistics kept by the federal government. Pinpoint companies that sell the type of product you want to market. Then start asking questions to see how close they are to the kind of business you wish to become. This will give you a list of companies that you can reasonably assume are your competitors. Next, find out their annual sales. Figure out a realistic estimate of how much of your competitors’ market you can attract. This is a very rough guess as to your market share. Check your estimates by conducting surveys of individuals who buy these products. You can do this yourself by setting up a short, free survey online or by hiring a company that specializes in them. Keep in mind that interest in a product and service is not necessarily action in buying the product or using the service. Sizing the market is an important task for market planning and budgeting for all startups, and all along the way throughout a product’s lifecycle. Markets change however, sometimes quite rapidly, so market size estimates should be considered fluid numbers.

Sizing the Market

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The joy of owning a business is the dream of many would-be entrepreneurs. If you are one of them, you have two main choices: start a company from scratch or find an already existing business. Your dream can become a reality more quickly if you decide on the latter. Here’s a look at important points to consider if you are thinking about buying a company. Pros and Cons The biggest benefit of buying an existing business is that the company is already in operation. Many of the kinks and early startup decisions, such as the site’s location, have already been worked out or decided. Money is one of the biggest concerns of a budding entrepreneur. Buying a business has both pluses and minuses in this regard. On the plus side, you do not typically have to worry about startup costs. Another plus is that immediate cash flow is often available from receivables and inventory. A company that is already in business has existing customers, and hopefully, goodwill on tap, too. If you need a loan to upgrade equipment or purchase new supplies, financing is usually a smooth process based on the business’s’ track record and profit and loss statements. Of course, there are downsides. The biggest is the upfront cost: namely, the purchase price of the company. In addition, hidden costs and problems may be buried where they are hard to see prior to taking ownership. There can be debts and taxes owed by the business or uncollectible receivables. There could be problems getting inventory, technological advances that make the product line obsolete, or overwhelming competition. Though you will now be a proud new business owner, you still need to build a good working relationship with the managers and employees currently running the company. Finding a Business to Buy Deciding to buy is step one. Then, you need to start researching existing businesses to find one that is a good fit for your budget and your interests. Good places to look include: The process of identifying and evaluating a business can seem daunting. Hiring a business broker is a good way to ease your way through the confusing jungle of buying a company. They can help you figure out exactly what type of business, location, size, and price you seek. Then they can use their industry contacts, skills, and experience to pre-screen firms for you. Negotiating is an intricate dance, but brokers are well versed in the process. They also know how to handle the paperwork required by local regulations, licenses, permits, bank financing, and escrow. Things to Consider When Buying a Business You need to protect yourself when buying a business. Having a team in place to advise you, including an insurance agent, accountant, attorney, and banker, is highly beneficial. Together, you can conduct due diligence and a thorough analysis of each company you are consider purchasing. Among the questions you need answers to are: If the business looks viable and the future looks profitable, the next step is for you and your team to dig deep into the operating details of the firm and analyze the overall financial health of the company. This involves an in-depth review of the history of earnings and losses, analysis of potential growth, and the worth of its brand name, goodwill, and position in the market. Next, you’ll need to investigate financial statements in order to project future returns. If this is not in your wheelhouse, you’ll need an expert who understands balance sheets, cash flow statements, accounting footnotes, tax returns, and income statements. You should go back at least three years if the information is available. Buying the Company Once you decide a business has potential and is within your financial means, it is time to negotiate a price. Most owners prefer to let members of their team, including the broker, do this. They are professionals who keep a focused, impartial view of the process. The result of their more impersonal bargaining style is often a better price for you. It is critical to have professionals around you that you trust. There are many types of legal and finance documents, from security agreements to bills of sale and IRS forms, that may need expert review. The process is complicated and can be stressful. Rely on a team of experts so that you get the best deal possible. Lastly, your final step is transitioning into the ownership position: getting to know the employees, the product line, new premises, customers, and suppliers. Taking on an existing business is not always smooth or uncomplicated, but with some expert help, hard work, and patience, it can be a profitable and exciting endeavor.

Buying an Existing Business

View Resource Buying an Existing Business
One of the biggest expenses many businesses have to deal with is the cost of leasing space for their business. Getting familiar with what the lease covers and which sections are negotiable can save you money and frustration. Here are important factors to consider when considering your space needs. Affordability Since leasing costs are one of the largest items in your budget, spend time looking at different locations and then comparing the pros and cons of each. Using a spreadsheet to compare variables is helpful. The items to account for are: Now is the time to learn how to read a lease. Ask your accountant, insurance agent, lawyer, or broker for help. Commercial leases are not easy to understand. Some are even hundreds of pages long. Factors that impact your total leasing costs, include: After you get a handle on how much these additional costs will add to your monthly lease payment, compare it to how much you can afford. The rule of thumb is to spend no more than 10% of your projected gross revenues. That means if the rent is $3,000 a month, you need to generate $30,000 a month in revenue to afford it comfortably. Lease Terms and Negotiable Items Much of what is in a lease agreement is negotiable. That is why it makes sense to hire a broker. Find an experienced agent who understands the local market well. You want one who works for you, not for the property owner. Make sure that the same time they represent you, they do not also work for a competitor or someone who needs the same type of space as you. Your agent can help you negotiate a deal that fits your budget. Here are the areas that are open to bargaining: Other Caveats Surprises cost money when it comes to leases. It is not uncommon for a business owner to call the landlord when the roof leaks into the IT department and get the reply, “That is your responsibility. Didn’t you read the lease?” Any legal document running to tens or hundreds of pages needs expert analysis. Find a reputable real estate attorney experienced in your property needs. Since leases typically run five to twenty years, you want to have a qualified professional make sure it benefits you. It is an investment in the future of your business, as well as your peace of mind. Getting the best deal on a lease means finding a broker, researching the market, comparing properties, and having an experienced real estate lawyer check it before you sign it. Investing time now can save you a bundle in the years ahead.

Leasing Space for Your Business

View Resource Leasing Space for Your Business
Are you thinking about forming a business partnership? Starting a business with a partner affords many benefits. In a perfect world, that means sharing the expenses, ideas, workload, responsibilities, and profits. In the real world, it can mean personal liability for the partnership’s activity, emotional ups and downs, personality conflicts, and differing ideas about the company’s product line, vision, and future. Before you decide to form a business partnership, it is helpful to learn about the different types of business models and the advantages and disadvantages of going down the partnership path. What Is a Partnership? There are three standard types of legal entities called partnerships. You must register with the business agency in your state for any of them.
  1. General Partnership.
    In a general partnership, each partner shares equally in the profits, liability, and responsibilities involved in running the business. Unequal partnerships are also available, in which different percentages are assigned to each partner, as laid out in an official partnership agreement.

  2. Limited Partnership.
    Also called partnerships with limited liability, limited partnerships have a more complicated setup than general partnerships. Here, each partner has both limited liability and limited input on decisions for running the company. Limits are defined based on the percentage each partner has invested. Limited partnerships are often preferred by individuals interested in short-term projects.

  3. Joint Ventures.
    Very similar to the general partnership, a joint venture lasts for a particular period or the duration of a single project. These can merge into a regular, ongoing partnership, but doing so requires a new registration of the business.
Benefits of a Partnership When you are evaluating all of the work needed to get a business up and running, a partner can look very attractive. Having someone whom you can share the workload, decision-making, expenses, and the emotional roller coaster of starting a business can mean the difference between making the big jump or letting it stay a dream. Other strong points in favor of a partnership include: Drawbacks of a Partnership Choosing the right partner will be the key as to whether your partnership succeeds or fails. It can be detrimental to the success of your business if your partner does not mesh in skills, outlook, commitment, money, and goals. That is just one of the issues you can face when working with a partner. Others you may encounter include: Reasons for Starting a Partnership Just as there are good and not-so-good partners, there are good and bad reasons to enter into a partnership. Good reasons: Bad reasons: Deciding to form a business partnership is one of the most significant decisions you can make for your business. Deciding on a partner is equally, if not more, important. Weigh the pros and cons of having a business partner. Choose someone you trust who adds additional skills to your business and has a personality that meshes well with yours. That is the formula that the most productive, successful partnerships have in common.

Partnership Pros and Cons

View Resource Partnership Pros and Cons
What are the three most important factors when starting a business? Some will tell you it’s location, location, and location. In many ways, it is true. The spot you choose has a significant impact on the success of your business. That is especially true if you are a service business like a restaurant or a store, but also true for factories and business-to-business firms. Factors To Consider There are many factors to consider in terms of choosing a business location, each of which will impact your success and decision-making. Points That Impact Your Business When deciding on a location, some things can have a significant impact on the success of your business. Where you set up your business can be the make-or-break decision for future success. Put the time into considering all the factors. Research more than one spot. Confer with your accountant, lawyer, the local chamber of commerce, and other local business resources. Talk to business people in the same area. The more research you conduct, the better chance you have of finding a profitable location.

Location, Location, Location

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Cash flow is an ongoing concern of most every business owner, whether they are just in the startup phase or have been in business for years. A business line of credit can fill those gaps when you are experiencing a cash crunch or get hit with unexpected expenses. Benefits of Having a Line of Credit One of the biggest advantages of a line of credit is the fact that you have control over your business. A business line of credit saves you from retrieving money from your personal savings account, using credit cards as a means of funds, or approaching family and friends if you have a sudden need for cash. Unsecured lines of credit are much like a cash advance but at a fraction of the cost. They offer funds that are quickly available when you have unexpected expenses. Unlike a cash advance on a credit card, they have no cash advance fee and offer standard payment rates and APRs. With a cash advance, these amounts can often be hard to figure out. If your business is new, a business line of credit is an excellent way to build a positive credit history. Obtaining a Line of Credit Like any credit or loan, most of the lending decision is based on how much of a risk you are. If you have a high personal credit score and your business is profitable, you are likely to qualify. You might also receive a better rate and a larger amount. Most likely you may have to secure the loan personally, especially if you are a startup with a sparse track record. Here are four things you should prepare for when applying for a business line of credit: Using a Line of Credit Effectively Once you get the line of credit for your business, use common sense to make the most of it. Use your line of credit efficiently with the help of these three tips. A line of credit is an asset to every business. Take the necessary steps secure one and then use it sensibly. It not only provides cash to meet seasonal demands and delays in collecting receivables, but also provides you with peace of mind.

Business Lines of Credit

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Improving your collection of receivables is essential if you want your business to thrive. Effective receivables collection not only provides you with the necessary cash flow for everyday business operations, but also furnishes you with crucial working capital to grow your company. Here is a look at the problems you might encounter getting your money and what you can do to streamline payment. Impediments to Payment There are many reasons a customer does not pay an invoice right away or in the period you designate, whether that is Net 10, two weeks or 30 days. The most likely reason is that they are trying to hang on to their money to pay their bills. In that case, a gentle reminder will often get the payment in the mail or paid online. On the other hand, it could be that the customer is a bad credit risk that is a habitual late payer. If you suspect this is the case, devise stricter guidelines for extending credit. If you have a very small business, not extending credit and expecting payment upon receipt is often the only sensible choice. Your customers have a budget and must manage money just like you. To take care of their cash concerns, they may put off paying you in a timely manner. Though this is often a part of operating a business, it can have a negative impact on your ability to pay your suppliers and your employees. Collections Best Practices To improve your accounts receivable collection strategy, take note of the 12 best practices tactics you can implement for your business. Collecting receivables is a tricky topic when dealing with customers. However, every business needs to have a set of guidelines in place that sets standards for extending credit, getting payment, and collecting late invoices. Assure your business of a steady flow of cash that will allow you to produce more inventory, sell more, and keep the budget cycle moving forward.

Effective Receivables Collection

View Resource Effective Receivables Collection
To propel your startup into the marketplace, you need working capital. It is hard to ask friends and family to get onboard on a speculative venture, even if you are sure that it is a winner. Without a track record, banks are often not keen on lending to new businesses. Investors are hard to find, and it is challenging to get noticed on crowdfunding sites. That leaves you with credit cards. According to the National Small Business Association, credit cards are the number one method for funding a new business in the U.S. If you have no other way to bring your dream to life, it can be a viable way to give your vision traction. However, it requires research, number crunching, and a good, hard look at the benefits and drawbacks. Here are a few things to consider before you pull out the cards for your new business venture. Pros and Cons of Using a Personal Credit Card for Business Using credit cards to finance a business has both advantages and disadvantages. You’ll need to weigh the benefits against the risks, for you and your startup. Benefits of Using a Personal Credit Card for Business Downsides of Using a Personal Credit Card for Business Alternatives to Credit Card Financing Besides credit card financing, there are other ways, potentially less risky, to fund your new business.
  1. Unsecured SBA loan. For example, SAM’s Club has partnered with Superior Financial Group to provide these loans, which require a personal guarantee. Most are in the $10,000 to $20,000 range. Check with the SBA to see what options are open to you.

  2. Crowdfunding. Kickstarter has provided funds to a broad range of people who have a great idea but little financing. Two others are Indiegogo and RockthePost. Crowdfunding requires a strong online presence, persuasive copy, and perseverance to sell your idea.

  3. Factoring. For a startup, this may not offer much help if you don’t have any receivables yet. However, if you do, you can often get immediate cash for your invoices at a discounted rate.

  4. Use your retirement funds. This is a big risk too, and it isn’t advisable to jeopardize your retirement. However, for many people their 401(k) offers a vast amount of money. You might have the option to borrow money against your 401(k) instead of withdrawing it.
You need money to start a business. Using credit cards is simple and doesn’t involve others in the risk of launching a new business. Be sure to look at the pros and cons from every angle before deciding if it is the right option for you.

Using Credit Cards for Financing

View Resource Using Credit Cards for Financing