So, you have an idea for a business. Great! And now, the next hurdle…funding. Where to find the money that will allow your business to get up and running? That is, sometimes literally, the $1,000,000 question.
Let’s start with what I consider the most straightforward funding option: bootstrap funding. You fund your business yourself. In my mind, this is the best approach. Having no debt is far less stressful than having some debt hanging over a business owner’s head. There are, however, some limitations to self-funding a business.
Probably the most readily visible problem with self-funding is if the funds just aren’t available. If the business you want to start has capital-intensive startup costs (think full-service restaurants, large scale manufacturing, etc.), that can be a daunting task to pull together thousands – if not tens or hundreds of thousands – of dollars to launch a business.
The sneakier problem with self-funded businesses occurs when a business owner scrapes together every last cent they can find in their couch cushions in order to open their business doors. It’s admirable to witness that scrappiness and dedication, but it leaves the business with no cash reserves once the business is operating. And then, what happens if it takes customers awhile to show up? What if it takes longer than anticipated for those clients and customers to pay their bills? What if there is some unexpected equipment malfunction that requires expensive repairs? What then? Stress – and massive amounts of it – is one of the likely answers.
In short, I heartily recommend bootstrap funding for a business, but only if there are adequate cash reserves left in the wings once that neon “Open” sign gets turned on for the first time.
If, for whatever reason, it just doesn’t pencil to bootstrap the funding of a business (limited cash on hand, high startup costs, etc.), what other options exist?
Let’s get the one that I find to be the most problematic out of the way: grants.
I can’t categorically state that there are no grants available for startups, because that would be a lie. What I can say is that grants for businesses are exceedingly rare and hard to come by. Of the grants that are available, most are directed to high-tech companies that are working to solve a problem that happens to be a priority of the federal government (defense, health care, energy, etc.).
On occasion, there may be grants that come available, with most of those being under $10,000. While that is certainly a good-sized chunk of money, keep in mind that there are thousands of other businesses competing for that one prize. While playing the lottery can be fun, I haven’t found it to be a solid business strategy.
One other thing to keep in mind in terms of grants: the “Billions of dollars in grants funds available for businesses!” landscape is rife with scams. Here’s a great article that can help you tell if a particular grant is legitimate or not: https://www.score.org/resource/blog-post/how-tell-if-a-government-grant-offer-a-scam-or-legitimate
With grants being such a long shot, that gets us to loans, the most common form of business financial assistance. While all business lending requires meeting certain requirements to qualify for a loan, it is especially tricky for a startup to acquire loan funding. The reason for this is that most commercial banks and credit unions need to see several years of business tax returns before they are willing to take a risk on issuing a business loan. This leaves startups – who are lacking any sort of a financial track record – in a Catch-22: new businesses need money to go make the money that they need to show lenders that they have made money so that they can qualify to get the money. Complicated, no?
To work around this roadblock, there are a couple options to consider. Working with the Small Business Administration (SBA) to get an SBA-backed loan is one approach. This is a labor intensive and time intensive process, but it can open doors to funding that may not be available to startups through standard lending channels.
The other option to explore would be to contact a Community Development Financial Institution (CDFI) as they tend to have less restrictive lending guidelines than standard commercial lenders. CDFI’s generally charge higher interest rates on their loans than standard commercial lenders, but the reputable CDFIs work alongside businesses to get them “bankable” with standard lending institutions as quickly as possible. To find the comprehensive list of CDFI’s across the nation, that information is available here: https://www.cdfifund.gov/tools-resources
While having the full list that is linked above is helpful, know that CDFIs are only authorized to lend within certain geographic regions. The site above doesn’t give users the ability to filter for those CDFI’s that serve the geographic region needed. Although this doesn’t include every CDFI out there, the following site allows users to filter to find those that serve our local region:
All right. We’ve covered three of the most discussed options for funding a business. We haven’t touched on crowdsourcing or equity funding (angel investor and/or venture capital backing) but we’ll save that discussion for next month. Stay tuned!
Mark Pond, MLIS, has been the Business Research Librarian with the Spokane Public Library since 2006, and, before that, worked in similar capacities for the Seattle Public Library and the University of Washington Libraries since 1998. Mark has led the effort to develop Spokane Public Library into a nationally recognized leader in the field of business research.