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Financing the Startup

Fundamental Questions

financeFinancing the startup may seem like a headache. It should not be. Organize your thinking by considering the following 10 questions:

  1. How little money do you need to start?
  2. What are your personal sources of funding?
  3. Do you want to grow within your existing funding?
  4. If so, have you calculated your potential cost levels vs. revenue flows?
  5. If not, have you considered the relative merits of short and long term finance?
  6. Can you borrow loan capital, committing to repay principal and interest and over what period?
  7. What are your net liquid/fixed assets and how much can you risk?
  8. What is the quality of your credit history and can you improve it?
  9. Can you find equity capital from the right sources and be prepared to give up a share of ownership?
  10. Have you listed the costs and benefits of alternative funding sources?

Keep the Books in Order–from NOW

Right from the get-go, keep your financial house in order and make sure financing the startup is no afterthought. The plain fact is that from the moment your start thinking about starting a business, you will be spending money, even if it’s just phone calls, a bit of mileage on your car, some paper… Hopefully you will have also set a high priority on bringing in some cash, too.

If you are not familiar with basic financial statements, the building blocks of business bookkeeping, then a very good place to teach yourself can be found at Early Shares University. There are many other sources, but this is nice and simple, as well as being graphic. You’ll probably find the rest of this crowdfunding site interesting, too. On the other hand, you can do a Business Accounting Basics course at EdX; it’s from Purdue University and you’ll learn the basics of the four financial statements to help analyze business investments and make profitable decisions. The course is free, takes 3-5 hours a week for five weeks.

When it comes to tax time, you will want to be able to present your profit and loss account, even if it’s just on a Schedule C (Form 1040) of your personal tax return. If you have gone as far as registering a  If you have lost receipts, shoved them all into a shoe box, not even thought about keeping them at all, STOP, and start doing it right away.

Bookkeeping is not too difficult to learn, especially if you use QuickBooks. However, what I suggest if you don’t know a good bookkeeper and tax preparer already, is to find a QuickBooks Pro Adviser. They are well able not only to be able to help you get set up with QuickBooks, but also to keep a steady hand on your tax affairs. I doubt that you need the expense of a CPA at this stage. If you click the banner on the right, it will take you to QuickBooks right away and then by just clicking Support and entering your zip-code for a local adviser, you’ll get a list of them.

There are of course many alternative bookkeeping products. You need to look around for the on that best suits you. Personally, I always found bookkeeping a pain to do, but is something that you cannot avoid, so better to make it as painless as possible.

Naturally, many entrepreneurs can’t be bothered with it and so outsource it or take on a part time bookkeeper. The danger there is that you think, “Ah, good, that’s something out of the way.” The problem is that bookkeeping should not be out of the way in the early days, since it’s going to be such an important part of keeping you finger on the pulse. As well as Quick Books, you might want to look at Fresh Books. They describe themselves as the accounting made for you–the non-accountant.

Conventional Sources

As you begin to think about financing the startup, do not imagine that it is simply a matter of writing a business plan and then tapping a venture capitalist for investment. First, VC money is for a tiny minority of startups and most have highly targeted funds with expectations of huge increases in value. Second, you could waste months of vain effort and the delay the start of your business. Both will cost you very dearly.

“Oh yes.” you say, “that’s right, but I can find a business angel. They are much easier to convince.” Wrong again. And in both cases, the relationship or introduction from a credible reference are likely to be much more important than an all-singing, all-dancing business plan. How many high net worth people do you know?

In the US, for an individual to be considered an angel, the status of ‘Accredited Investor’ is required. An Accredited Investor must have a net worth of at least $1 million or have made at least $200K each year for the last two years. So, I ask again, how many such people do you know?

To come back down to earth, know that startup finance raised by Inc. magazine ’500′ companies (the fastest growing private companies in the US) in 2007 came from these sources:

Source Percent
self-finance 81.6
loans from family, friends and associates 21.6
bank loans 17.7
lines of credit 17.5
venture capital 7.6

Among the larger list, the Inc. 5000′ high fliers, also bear in mind that while 62% of them had an exit plan, only 28% of those aimed at going public. Thus, almost every startup should forget the dream of an IPO. Basically, the stock market is not a viable source of funds for the startup.

Even among the ‘Inc. 500′ companies (the top echelon of startups) as many as 14% raised $0 to start the company! Pre-launch, the median for funds raised by the fast-growing companies was $50K. You can compare the funding sources in the table below from Entrepreneur magazine & PricewaterhouseCoopers’ 2006 ‘Hot 100′ listing of fastest-growing new entrepreneurial companies:

Source Percent
savings, personal 69
private investors 21
family and friends 21
lines of credit 18
bank loans 12
credit cards 10

There are two kinds of capital finance that may be important to you. The first is short-term and medium-term loans and the second is risk, or equity capital. There are variants of each.

If you are looking for loans, a very good way to go is to seek SBA-backed loans. The place to start is the SBA LINC, that connects borrowers with SBA approved lenders.

Alternative Sources

There are also other means of financing the startup. These include:

  • Personal or business credit cards, which I strongly advise against given the dangers of high rates of interest, the speed that indebtedness can compound and the likely damage to credit ratings;
  • Grants that may apply to your business, which should be grabbed, but should not be the condition for success, or the business will fail;
  • Bootstrapping, or finding ways round conventional means of financing—the best source, especially combined with the business’s own revenue, the cheapest source of finance;
  • Business Social Loans, or (P2P) finance, which can often be at rates of interest that are lower than those offered the banks, but watch out for personal relationships;
  • Crowdfunding. You probably participate in social networks. Crowdfunding uses this approach to raise money for your new business.
  • Supplier finance programs, which are now begriming to appear—an example is Whole Food Markets Local Producer Loan Program—they are good but may reveal more than you want to your customers;
  • Customer finance programs. British high-end chocolate maker and retailer Hotel Chocolat, currently operating over 40 stores in the UK, the Middle East and the US, wants to expand even further. But rather than turning to banks or big investors for money, they’re inviting customer to buy bonds. Bonds that will pay chocolate returns. A new version of what Ben & Jerry’s did years ago.
  • Consignment programs where vendors supply product on a sale-or-return basis;
  • Community Supported Business. Take a look at the opportunities described in my paper on Community Supported Business;
  • Strategic partnerships or partners may offer you a source of money where there is strong mutual interest;
  • Soft loans, such as those offered or backed by the SBA or other development institutions (e.g., regional, disadvantaged)
  • Leasing, rather than buying capital equipment or vehicles—and you can consider joint purchase of capital equipment that you won’t use full time;
  • Financing accounts receivable, often called factoring, but in my book this is expensive and risks customer relations through someone else chasing payment;
  • Business plan competitions—there are many examples both at business schools and at development organizations (a startup called Yodle won the Wharton Business Plan Contest in 2005 and pulled in $12 million in VC money in 2007; John Ready of Ready Seafood won a $60K business plan competition in 2004 and, with his brother Brendan, now has a $10m business in Maine; my local Brattleboro development corporation in Vermont offers $20K as a top prize).

If you are buying an existing business, new financing creativity is often necessary. Acquirers accustomed to providing only 30 percent equity (ie hard cash) and funding the remainder of a deal through bank loans are now lucky to get even 50 percent of the purchase price. Increasingly, they are looking to the seller to supply a separate loan (often called a note), to cover the remaining 20 percent. The seller is becoming the lender of last resort.

In the US, under the Hiring Incentives to Restore Employment (HIRE) Act, companies can save as much as $7,621 per qualified employee under HIRE. Most governments periodically introduce such incentives and though a certain amount of red tape will always be involved, savings like these amount to grant money and should be taken whenever offered. Do not however base your business plan upon them. If the business does not stand up on its own, it will probably not be sustainable anyway. Like HIRE, most of the schemes are of limited duration.

You may not have thought of PayPal as a source of finance. Well, it’s not exactly, but you can use their online invoicing by email  service to ensure early payment of your invoices.

If you have a creative project–it can be a business–take a look at Kickstarter. They’ve got a pretty broad definition of creativity: art, music, design (fashion, product, game, app, etc), film/video, food, journalism, and other projects that spring from the imagination. Funding is always all-or-nothing. A project must reach or exceed its funding goal or no money changes hands. Why? It’s fun, dynamic, and really efficient. Creators keep 100% ownership. Kickstarter is a new form of commerce and patronage, not a place for investment or lending. Project creators inspire people to open their wallets by offering products, benefits and fun experiences. Kickstarter collects 5% from the project creator if a project is successfully funded. You will find many other similar sources on my Crowdfunding page.


Don’t get too excited! You have only 1.39% chance of getting angel funding and only a 0.25% chance of attracting venture capital. But you might enjoy listening to a radio broadcast when a new game-based, voice recognition language learning company pitched two angel investors. I appear occasionally on this tech startup radio program me and I gave feed back as well as the angels.

Sources Compared

There are advantages and disadvantages in each means of financing the startup. It is important to select the one that suits your business, or which you can access.

Source advantages disadvantages
Personal6 no 3rd party, simple decision may risk too much at home
Credit cards1/4 easy, if good rating of self or business expensive, compound interest–ugh!
Family/friends2 likely to be favorable ? risk relationships, promissory note
P2P1/2/4 smaller sums, fast, can be good rates needs managing + who are lenders?
Associates2 advantage for mutual business confidentiality
Bank loans1/2/3 traditional, safe require security, costly for new co
‘Soft’ loans1/2 useful, infrequent close scrutiny, tight conditions
Credit lines1/2/3 good especially is fixed ahead of need varied ways to pay off, flexible
Mortgages1/2/3 on business property linked to business on home, increases stress
Grants2 ‘free money’ ‘strings’, may require investment
Leasing1/3 appropriate for assets choose the agreement with care
Receivables7 quick cost of discounts or factoring
Bootstrapping4 best route, except for big sums needs creativity and doing it yourself
Community5 show of support from those around you risks ‘dirty washing’ in public
Customers4/5 get close to customer, eg pay with order pressure to perform
Suppliers1/2 often willing to ‘deal’ to secure order failure to pay back has bad results
Angels1/2 you get a mentor & ‘free’ advice will a HNW person back you
VCs1/2 could help put you into orbit tiny chance
Stock market2/8 capital, not loan ‘never’

This is only a summary and each source—or a mix—requires more careful consideration. Whichever source you choose, there are consequences to take into account. Here are some important ones (the numbers are marked against the sources in the table above):

  1. need credit/personal assets report
  2. business plan required or an advantage
  3. secured, against fixed or financial asset
  4. unsecured, but some may require security or personal guarantee
  5. offered against future product delivery
  6. personal, not business risk
  7. expensive, third-party deals with customer

Angel investors are probably the only group that you are likely to appeal to and even then it may be a stretch. An excellent place to start (I have in the past and may do again) is Angelsoft. They have startup funding tools that simplify the process of raising startup funding. There is a directory of nearly 500 angel groups hat include 15 thousand or more individual investors.

Equity, Loans and Working Capital

Separate in your mind the differing roles of different purposes of financing the startup.

  1. Equity is for the long term and in many ways at the level you work at, equity capital will imply that whoever supplies it is a partner of some kind. It seems very appealing to get finance without having to repay the capital or interest. But there is a price to pay. The financier will expect a return on the investment and will quite likely want to have a say in major decisions. Plus, you will have to meet some objectives that may be different to your own. Many entrepreneurs resist this more strongly than losing some of the equity.
  2. Loans can come from many sources and be of many types. They may even come from equity owners. If you want to seek a loan, prepare your ground properly.
  3. Working Capital is best sourced from revenue, but there are external sources and can be expensive. The most natural is your bank, but in times of credit squeeze, even this may be problematic and/or expensive.

Compatible Financial ‘Partners’

Years back when I ran a fast-moving service business, I made a mistake in trying to align my business with the requirements of our bankers. It was a hard lesson. For years as the company grew, with very limited assets, the banker continually suggested that we should build tangible assets into our balance sheet. Finally we caved in, also being seduced by the idea of buying a property befitting our business.

However, we had no need to be property owners; we were not in the real estate business. But the banker felt more secure with us having what he called a ‘security’ in our books—something with which he could reassure his superiors. In fact it turned out to be an ‘insecurity’ The mortgage crippled the business.

In the same way as is natural in marketing and recruitment, where you seek appropriate customers and staff members—without even thinking about it, so should it be with your financial partners. Make sure that their interests and values coincide with your own. You don’t want them calling the shots, especially when the going gets tough.

Take the trouble to avoid falling into the arms of the first banker who will open an account for you or lend you money. Find one who’s scale and culture is compatible with yours. If you are seeking an investor, do not cozy up to one who is simply in it for the dividend, because in hard times it will no longer be so cozy.

If your business is ‘environmentally friendly’, find a ‘green’ investor. If your business serves the local market, choose a community bank or the neighborhood Savings and Loan.

Right Finance–Right Time

When you are seeking funds, you will probably be thrilled to get any money from anywhere, but every aspect of financing the startup requires great care.

Why take care?

Because not all finance is created equal. At different stages and for different purposes, the right kind of financial source should be used. You may have heard about ’rounds’ of finance, where larger or high-tech startups are concerned. They may follow a sequence like

  • personal funding
  • friends and family
  • bank
  • seed round
  • angel round
  • ‘A’ round
  • ‘B’ round
  • mezzanine round
  • IPO.

But don’t worry about that. At each stage one source or other is going to be appropriate, because of the needs of the business at that stage.

At the pre-launch stage, you will want to keep as many of your options open as you possibly can, so your own resources are generally the best form of finance, supplemented perhaps by a line of credit. The line of credit only needs to be called upon if needed. No need, no repayments or interest. An excellent way to look at the pre-launch stage on the financial front is to take a look at the Khan Academy videos on VCs.

Next most flexible, probably, are loans from friends or family, but make sure that you arrange these in a formal way with a promissory note, to avoid squabbles if things do not work out as planned. Use Zimple Money to undertake the formalities for you. It is not expensive and may save a lot of cost later. Zimple Money is a social finance community that connects people with common financial interests, and provides online tools for managing financial relationships in a socially networked environment. Whatever you do, make sure you have a promissory note. You can download one free from Docstoc.

See the page on Bootstrap Finance for a lot more information on this. Why not give Crowdfunding a try, too.

At which ever stage, just make sure you think about the consequences of tying yourself up with a particular source. In most cases you will be making a medium to long term commitment. There’s a nice infographic here on How Funding Works–Splitting the Equity Pie with Investors.

Readiness to Negotiate

Are you ready to negotiate financing the startup? There is no point in walking into your local bank with your super duper prototype that is the best thing since sliced bread and expect to walk out with a bag of money. It is not going to happen. One of the best things you can do is to have a business plan in your hot and sticky hand. But above all, you need financial numbers.

Remember that anyone, I repeat anyone, from whom you seek a loan will want to know one thing above all: will you be able to repay the loan in a timely manner? In order to show that you will be a good bet, the lender will want to know about:

  • your relevant track record, and those of any associates;
  • your investment in the business;
  • your other assets, especially your liquid ones and your willingness to pledge them;
  • your sales: actual revenue banked to date and evidence for the near future;
  • your fall-back plan, if your forecasts don’t pan out.

Get ready. If you are going to seek help from the SBA for a 7(a) Loan Guaranty, for example, there is a whole list of documents and information required for a submission. You will find that much of what is required will also be asked for by the bank, too.

There are examples of startups that go through the stages like greased lightning—an example is NComputing whose co-founder Young Song says, “There is nothing more exciting than to build a company from zero to nearly a billion dollars in sales in only one year.” Take a look at CEO Stephen Dukker talk about it in the video Forget the $100 Laptop.

Answer investor questions before you ask for money

Entrepreneurs seeking to raise investment money often come away empty-handed and disappointed from presentations to investors. if you can anticipate the kinds of question that you will be asked, your chances of success are greatly increased. Here are some of the questions you may encounter:

  1. What is your burn rate and runway today?

  2. How much “skin” is already in the game?

  3. What’s the total history of this company?

  4. How well do the founders get along with each other, and with the team?

  5. What’s in this deal for me?

  6. Who do you have as outside board members?

  7. Who is a real customer that I can talk to?

  8. How solid is the intellectual property?

These questions come from, a crowdfunding website designed to fund small businesses, entrepreneurs, and nonprofits. It is the ideal tool for entrepreneurs to leverage networks, reach out to new contacts, and fill in the missing pieces of their projects. Rock the Post provides budding businesses with the means necessary to amass resources and flourish. Another source of helpful advice is VC-List that was created to educate startup founders about the funding process. Joanna Laznicka, the publisher, posts educational articles from many other experts covering all aspects of how to raise capital for a startup.

Intermediary Sources for Finance

There are a growing number of places to go to help you find finance for your startup. So many startups make tracks for their local bank and come away empty-handed. Often the journey involves traipsing around multiple institutions without know their criteria, filling in paperwork each time.

In a time of tight money, the internet affords you all kinds of opportunity to make your way to an appropriate lender, faster and easier. One super example is TEN Capital (only operating in Texas at the moment). Founder Hall T Martin has been quietly building his networks and what he calls his ladder of finance, from Equity Crowdfunding, through Intrastate Fundraising to Angel Funding (in Texas, generally through what are known as Family Offices). TEN does this by supporting startups through the stages. They first of all help startups to assess their readiness for funding, and then through a monthly subscription of $295 a month, they coach the entrepreneur to a point where they are likely to be successful in raising capital.

Here are some of the other internet intermediaries that you might want to try:

1.Venture Funding Network is an active online network that brings entrepreneurs, investors, financiers and service providers together. It is really a useful place to find information about financing the startup. Their virtual network serves as a connection engine, a learning environment and a meeting place where members can post listings to find the right “door openers”. As an entrepreneur, you can sign up for free and your profile will be visible to funders. If you pay an annual $299 subscription, you can gain access to their listing of angel investors and venture capital firms and other services.

The caveat, of course is that very very few startups will be likely to attract angel or VC funding. Many people think that all they have to do is to write a business plan and the VCs will flood to their door. Nothing could be further from the truth, but if you think that you have a genuine case for venture capital , then Venture Finding Network is certainly THE place to try your luck.

2. Lendio is a passionately entrepreneurial business that offers a platform to match business borrowers and business lenders. Sincethe match is often such a difficult process, they have developed algorithms to help. So often an entrepreneur seeking finance will simply go to the bank where they keep their checking account and ask for a loan. They often go ill-prepared and not having worked out what the real financial need actually is. Brock Blake, the founder says, “Entrepreneurship is an addiction here. And because of that, we’re committed to helping other business owners succeed. It’s what we do. It’s what we obsess about. And we love it.” The way it works is that you

  1. answer a few simple questions about your business,
  2. choose your loan types,
  3. view and apply for appropriate loans.
  4. keep updated on progress of the application(s).

3. Connex Club International. Financing the Startup is tough at the best of times, and sometimes nearly impossible in a rough economy with high unemployment. Connexx Club has the tools and the experience to help you get the business financing you need. The site covers a wide range of subjects about raising capital and loans as well as helping you to actually do so. The range of funding opportunities includes

  • angel investors
  • asset-based lending
  • business credit
  • cash flow financing
  • debt financing
  • merchant cash advances
  • private placements.

4. is a secure, centralized platform for all aspects of investing in private companies that has integrated tools to manage a capital raise or asset sale, and to handle investor relations. It has a network with thousands of entrepreneurs, angels, fund managers, lawyers, brokers, and others. Their claim is that they make private investment easy, secure, and social.

5. LoanBack: Borrowing money from friends and family is easy to agree and not so easy to formalize so that the relationship is not put at risk. LoanBack is the easiest, simplest and most effective way of ensuring loans to friends or family come to a successful close, leaving everyone involved satisfied.

6. Biz2Credit: This is an online platform matches entrepreneurs with credit solutions based on their business profile and preferences in a safe and price transparent environment. Biz2Credit is a so-called ‘matchmaker’ and was founded by an ex-Ernst & Young accountant and they say that they have over $400 million in funding and over 150,000 SMB users in the US.

7. BoeFly is an online marketplace harnessing technology to dramatically simplify the execution of commercial transactions, including all loan origination and sales. It is a loan exchange that efficiently connects small business owners with more than 2,400 business lenders. BoeFly is a subscription service and does not charge any transaction fees.

8. CNF Exchange: The creators of CNF Exchange felt that there was a better way to bring borrowers, lenders & investors together – this is why they built CNF Exchange.  They are focused on getting borrowers funded and getting lenders & investors qualified leads–to provide a system that will allow borrowers, lenders & investors to manage their financial transaction in the most convenient and effective way.

9. On Deck Capital: A strong cash flow and good payment behavior demonstrate the performance of your business and can help you to qualify for business loans to businesses that have been generating revenue for 1 year from On Deck Capital. The loans are from $5,000 up to $150,000. By reviewing business performance in addition to credit history, they can identify healthy businesses that others pass by. They work with small business owners with a wide range of personal credits scores.

10. AngelList: AngelList is THE place to go if you are looking for angel equity funding. You can post your startup there and see what response you get from investors. AngelList is also sandbox where a budding entrepreneur should play. It has much to offer beyond finding capital. Just looking at what others are doing will provide many insights. A casual glance gave me DreamFunded, an online angel capital platform providing angel investors access to pre-screened deal flow, with investment minimums as low as $1,000. There are job offers and AngelList and it can be used to recruit startup talent. I found a startup, Beneath the Ink – ebook software, that inspired me to think afresh about my next ebook. You might find a potential partner there.

11. Lendza: Small business loans are used by more than 80% of businesses to help finance growth and expansion. The problem is more than eight out of every ten small businesses in the US have been turned down by a bank or credit union when applying for a business loan. This leads many businesses to seek financing through less than reputable sources, like payday loan establishments or through high-interest cash advances. Due to their inherently high interest rates and inflexible terms, these options are often beneficial for the lender – not the borrower. Lendza has an interesting model of an alternative approach that avoids the usurious interest rates of alternative sources of loan money such as invoice factoring.

12. MultiFunding: A good alternative to Lendza is MultiFunding. It could well be worth your while to go to both and compare the offers you get. Their list of options is somewhat similar, but slightly longer. Ami Kassar MBA is the founder of MultiFunding and they are based in Pennsylvania. When asked about his business, Ami said, “The goal for my company, MultiFunding, has always been to make business lending more transparent; that is the hope for the future of the financing. The lending world is not neatly arranged and many businesses aren’t sure of their options, let alone who might be able to help them. I wanted to fill that gap.”

12. Onevest unites RockThePost, an online investing platform that connects early stage startups with investors, and CoFoundersLab, an online and in-person matchmaking network that builds strong startup teams, to solve two critical challenges every startup faces: developing a strong management team and raising capital. As an entrepreneur you can use their platform for free to raise capital if you manage the process yourself, or pay a success fee if they do. There are 50,000 investors and entrepreneurs active on the site and about 7,000 introductions are made each month. Over $60 million has been raised through the site so far.

13. Get Funded is interesting for those who have been in business for at least a year and have sales greater than $100,000. Not for startups, but soon thereafter. They base their lending on cash flow, not security.

14. Community Sourced Capital (CSC) works mainly in the Pacific Northwest to help people raise interest-free loans of between $5-50,000. The money is raised in ‘squares’ of $50 each and is available for a three-year term. People can lend more than one square and become ‘square holders’.No interest is paid to lenders, but the principal has to be repaid in full. That money can be re-lent to another venture. It is similar in principle to how Kiva, the micro loan platform, works. CSC charges a one-time $250 at the outset and then a $50 fee for each month of the loan. In 2017, CSC has transformed from a company into a non-profit itself. The community loans are an amazing way to increase engagement with current or future customers.

More Financing Help

Financing the startup is a vast field and you are going to navigate it in the way that suits your particular business. It may be that you will find what you are looking for at Bootstrap Finance: Thrifty is Nifty; in the Finance section of the Useful Website Links page; at the Startup Owl’s Bookstore; or among the products in the Tool Chest. If you are bamboozled by financial terminology, then go to The FT Lexicon to get the explanation.

If you want to find some super help in financing your startup, try Growthink University, where you will find a roadmap for starting and growing your company…no matter what business you’re in.

You will be able to check out the wealth of material on a $1 trial 30-day membership. You’ll find articles, interviews, audios, videos and stuff that you can download – such as webinars that you can listen to in your car.

It includes tools such as sample business plans, business plan templates, and access to their online venture capital database which can help you find the right investors for your business.

PLEASE NOTE: There is tons of useful stuff on Startup Owl, a site that’s been going for a dozen years. So keep browsing, but know that the founder, Will, now devotes most of his time and energy to his new website that you should definitely visit:

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