Piecing the Jigsaw: Gathering Money to Finance Your Startup

Many would-be entrepreneurs worry about where to get the money needed to finance their startups. This is an obviously important consideration, although there are many ways to finance your startup that don’t go the traditional route of borrowing or venture financing, which both have serious drawbacks. A bigger consideration should be whether your business idea has “legs”; in other words, does it offer the potential to reach both your financial and personal goals? If the idea does have legs, then you’ll find a way to bring the financing together. Have a little faith. To help you consider some alternative financing options, I’ve written this little guide to get you started. Good Luck!

How much do you need to finance your startup?

No matter how you approach things, starting a new business costs money. Often lots of money. That puts all but the most well-heeled founders in need of options to finance their startups. You should start by calculating how much money you need to get your business off the ground. Here are some things to consider:

• Build a business plan that lays out all the expenses needed to open your doors. We call this your burn rate or how fast you go through money. Consider things like rent, utilities, inventory, equipment, insurance, payroll, taxes, and legal fees. The Small Business Administration offers a calculator to help you with this.
• Plan on starting with three to six months of your burn rate on hand before you open your doors, according to the US Chamber of Commerce.

How to finance your startup

Many folks who consider embarking on the entrepreneurial journey think of only two options for funding their venture: borrowing from a bank or finding a venture capitalist to supply the necessary funds. Neither of these options is particularly good. Borrowing involves paying interest on the money, which can strap the resources of your fledgling venture as your revenue will struggle to keep up with both the expenses and debt service. Also, bank loans are hard to come by even with a strong business plan showing a good future revenue stream. The option of government-backed borrowing, such as the US Small Business Administration’s program, isn’t much easier unless you have impeccable credit and a strong revenue stream.

Getting investment from a venture capitalist (VC or Angel Investor) may seem more appealing until you realize that getting this funding is equally hard. Sure, it’s attractive since you don’t have to pay interest or even return the investment, but you give up control over your business and a goodly chunk of your revenue in the form of dividends. VCs also want to get their investment back within five years (either by selling the company or forcing a buyout), which may cripple your growth. Sometimes, you luck out and find a VC that installs an advisor with great business acumen and experience who actually helps you weather the challenges of running your startup. Adobe founders found this with their VC and he really saved their bacon, according to one founder.

There are many other options to finance your startup that might not come to mind initially. Let’s turn to exploring some of those options next.

Leveraging your expenses

Leasing is something that can work in terms of lowering your startup costs through borrowing equipment and supplies rather than buying them outright. You might also consider bartering with another firm to obtain needed materials.

But we can also make the most of our personal assets to maintain a steady cash flow, such as real estate. You might consider renting out your property or using a short-term leasing option like Airbnb to provide a steady cashflow while renting a less expensive place to live in. While it can be difficult to keep track of, this is where something like an Airbnb property management company can make things far simpler.

Another leveraging option is to hire gig workers and agencies rather than adding full-time employees to your payroll. While this may seem more costly, it’s actually a sound strategy as you gain the necessary skills to accomplish tasks and only pay for the portion of the time you need them.

When you keep more cash available to fund day-to-day operations, you need far less to finance your startup initially.

Take on a partner

Payroll is a huge expense for any business and can be the straw that breaks the camel’s back for a startup. You can reduce your payroll while still hiring the best workers by setting up a profit-sharing program that compensates them for a lower-than-average wage or take on a partner who will share the burden of helping to finance your startup while taking a share of the business rather than a large salary in the beginning.

One option you should never choose as a means to lower your payroll is hiring less qualified workers who will accept a lower salary. This will bite you in the butt in the long run, as unqualified workers are less productive and can make costly mistakes.

Start slowly

There’s no rule that says you must quit your day job before starting your business. Like many folks, I started this business as a side hustle before I quit teaching at universities. Not only did I further hone my skills since my day job and my side hustle dovetailed but I was able to self-finance my startup. My day job also provided health insurance, which greatly reduced my startup costs and access to resources, such as networking.

While your day job and side hustle might not dovetail as well as mine did, it still provides living expenses and something left over to fund your startup.

High-interest savings accounts/ low-interest credit cards

Any surplus cash you have while working your side hustle or even once you start your business should go into a high-interest savings account. This may very well be low on the priority list, but when you use this strategy, it ensures that your money is working for you as much as possible, even when it’s not being used directly in your business operations. Any sort of help is beneficial, and a high-interest savings account is one of the simplest ways to do it.

Alternatively, seek out low-interest credit cards, especially those that offer a low introductory rate for the first year. While this isn’t the least costly way to finance your startup, it doesn’t get the same scrutiny as borrowing from a bank to start your business.

Sell unused assets

It’s vital that you operate with a lean approach to business, particularly at the very outset. Consider selling any unused equipment or personal property to generate immediate cash, which can improve liquidity and reduce the maintenance costs associated with holding on to these assets. As your business grows, you may find some equipment, supplies, or inventory doesn’t fit your current business model or didn’t work as intended. Getting rid of this reduces your costs (storage, for instance) and gives you a shot of revenue you can always use.

Learning the right types of passive income

Passive income is great as it means a revenue stream into the future. For instance, you might set up a subscription service to generate a steady income for your business. If you’re running a company, consider using the influence you’re building to support your business goals to earn income as an influencer or earn affiliate income by sharing products from non-competing companies.

Look at sharing your skills

If the business is not generating much profit in the short term, what have you learned up to this point that you can pass on? Teaching classes or creating educational content is a simple idea that can make a massive difference in helping generate short-term profits to support your business and fuel its growth.

Or, consider selling your skills online through marketplaces such as Upwork or Fiverr. You might even supplement your revenue by becoming a Lyft driver or delivering from a company like Uber.

Conclusion

The entrepreneurial journey is full of ups and downs, so you need to have the best approaches to keep yourself afloat in the short and long term. Try some of these and see what they can do for you!

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