Finding the finances to start your first business

The benefits of entrepreneurialism are tempting: freedom and flexibility, a chance to profit off your own hard work, and potential rewards far beyond those possible by way of a conventional career. But launching a new venture takes start-up capital and pulling together enough money to give yourself a practical runway can be a challenge. Here are five options that others have used to succeed:

Go to the bank

You need money; banks have money. It’s a match made in heaven . . . maybe. You can make an appointment with a bank or lender, but it’s going to take some work up front. You’ll also want to carefully weigh the pros and cons.

Bank funding requires collateral and a convincing business plan. You have to convince the lender that you’ll be able to pay the money back, and your business is likely to make money in the first place. That means you have demonstrable expertise, you’ve invested in crafting a professional, detailed business plan that you can share, and you already own something of value (usually a house). It also means that you’re gambling against your future, and if your business fails, or fails to grow and produce a profit fast enough, you stand to lose a lot.

There’s also the interest to consider. Credit and bank loans usually require regular payments against the loan, and the interest keeps accruing until the whole thing is paid off — meaning you’re paying extra for the privilege of having the money now. It works like your credit card; you don’t have to pay it all off now, but it costs you more the longer you stall, and you do have to keep up a minimum payment.

Taking out a loan to fund your start-up is a risk, and you should limit risk unless you have a plan to mitigate it. Maybe you have clients or customers lined up and can rely on a steady workload. Maybe you have lots of equity and can afford to lose some of it without being completely ruined if things go sideways. Maybe you have a business that will start producing and making back money very quickly, and just need the quick up-front cash injection to get started. The great thing about loans is, once you’ve paid them off, they’re done. You still own your business, and you get all the profits of your work from that point onward, so they do hold some appeal over investment loans.

Find investors

When it comes to investors, things work a bit like a bank loan, except investors generally want an interest in your future success. They may be willing to take a bit more risk than a bank would in order to continue making money off of your work in the long term. An investor often has a specific area of investment they’re interested in, and their expertise in that area may make them more confident that you could succeed than a bank would be. You still need a convincing business plan, but collateral is less of an issue.

An investor is a critical way for many current start-ups to get off the ground. Ambitious entrepreneurs need large amounts of money to scale up a great business idea, and generally don’t have millions in collateral to self-fund their venture. But they risk losing control of their business to the investors if they get in over their heads, investors may be cautious and take a lot of convincing or refuse to do business, and the long-term profits are distributed among more parties.

You’ll hear a lot about investors from typical Silicon Valley start-ups and shows like Dragon’s Den. If you have a big idea, an untapped market, and expertise without capital, investors can help you gain a foothold and grow at a startling rate. But many investor-funded start-ups don’t know how to scale with rapid growth, don’t deliver on promises, spend too much time and energy chasing investors, or lose control of their idea and business.

Save and bootstrap

The ideal way to launch a venture is to do it while working at a stable day job. Save up money, self-fund, and grow organically. Use your regular job to cover personal and start-up costs and reinvest profits in your business at first to grow it without outside support. Jan Berkowitz is an entrepreneur who used this technique to great success, launching his first venture — a concrete production business — using his savings, and growing it rapidly.

Self-funding and bootstrapping a venture can be exhausting, and requires a slower, steadier growth pattern than bank or investor-funded launches, but you can keep ownership of your business and your profits, limit risk, and build a more stable, healthier business for the long term. This is especially viable if you have a low or no-cost start-up idea.

Free money

There are two things to look into, and they’re worth a bit of effort in return for some (mostly) free cash. Small business and start-up grants are sometimes awarded by regional or special interest groups. If you have some sort of minority or disadvantaged status, a relationship with a funding organization, or live in the right area, you may be able to apply for a grant for your venture.

Crowdfunding is a sort of micro-investment tactic. You sell prospective customers on an idea (product) and they pre-purchase or invest in its eventual production. This can be a savvy marketing and fundraising technique, or a time and energy drain as you chase backers and are pushed to deliver a working product on a set timeline.

Every funding option has its pros and cons, and your circumstances will limit which options are open to you. Those with a high-risk tolerance, strong collateral, and a compelling business plan might prefer loans or investment to achieve impressive growth quickly. Those with a well-paying day job and an entrepreneurial spirit can take advantage of self-funding and transition into it as a full-time gig when the moment is right. Everyone should investigate grants and consider crowdfunding as part of their strategy. Freedom, flexibility, and long-term rewards are within reach.