How Real Entrepreneurs Fund Their Small Business Dreams
You want to start a small business, but you know you need a heroic amount of cash to get your business idea off the ground. The internet can offer dozens of ideas for funding your entrepreneurial dreams, from borrowing from friends and family to launching a crowdfunding campaign to pursuing support from venture capitalists. But, do any of these methods actually work? How do actual entrepreneurs manage to assemble enough capital to build a business?
In truth, taking inspiration from real-world entrepreneurs and small business leaders is a smart way to start on a successful financial path. Here are a few statistics about small business funding that you might find useful to your small business planning.
More Than Half of Entrepreneurs Use Personal and Family Savings to Fund Their Business
There is a good reason that most entrepreneurs use personal and family savings to fund their business to some capacity: It is easiest. When you have your own money to spend, you don’t have to waste time or energy pitching investors your business idea or bothering with loan terms and interest rates; you can simply get started building your business with whatever savings you can spare.
However, there are noteworthy downsides to relying only on personal savings to fund your business. First, not everyone has enough saved up to cover all the expenses of a brand-new business. Depending on your business concept, you could require tends of thousands or even millions of dollars of startup capital, and unless you are quite wealthy, you probably don’t have that amount of cash lying around, which means you will need to use other sources of funding, anyway.
Additionally, relying significantly on your personal savings could risk your personal financial security. Generally, it is not a good idea to drain your personal savings entirely, especially if you have a family or home with higher monthly expenses. Businesses are risky endeavors, and it could be several years before your new business turns a true profit, so you should ensure that your family has an appropriate financial buffer as your small business grows.
A final consideration about drawing upon family savings to fund your business is that you should avoid asking friends and family members for loans or investment into your business — unless, perhaps, they are professional lenders or venture capitalists. When you ask for money from loved ones, your relationship with them can become strained, and that extra stress within your support network can make it more difficult to build your business successfully.
Ultimately, you probably will utilize some of your personal savings to build your business, but how much of your startup is funded by bootstrapping is dependent on many different factors.
Many Small Businesses Rely on Small Business Loans and Other Financing
The second most common source of funding for new small businesses is small business loans. Loans are much more accessible for the average small business owner than other types of financial investment, like venture capitalism. Major banks offer business loans, but so do local credit unions, online lenders and more. Though requirements for loans vary from lender to lender, almost every entrepreneur has access to some form of financing that can improve business growth.
Getting a small business loan is easier than you might expect. If you have good credit, you can work with a traditional bank, which should give you access to longer repayment terms and lower interest rates. If your credit is not perfect, you can still find business loan options, though you may need to accept less optimal terms.
Even better, federal and state agencies tend to develop financing programs to help certain types of entrepreneurs or certain types of small businesses acquire the loans they need. Local economies benefit greatly from small business, and encouraging people of all backgrounds to pursue entrepreneurship can improve the strength of different communities. You might look into SBA loans, many of which are designed with minority businesses in mind.
Admittedly, there is another form of financing that is somewhat popular with new business owners: personal credit cards. However, it is not a good idea to put business expenses on personal credit cards; not only will you be personally liable for the debt, but you won’t be able to keep up with interest rates and repayment terms. A smarter decision would be to apply for a business credit card in your company’s name or pursue a business line of credit.
By no means are these the only two ways to fund a small business. You could try to attract an angel investor, or you might pitch your business idea to a venture capitalist firm. However, bootstrapping and business loans are by far the most common ways that small businesses get off the ground, so you should probably consider working them into your business plan.
