3 Most Common Ways to Finance Your Small Business

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finace your small business

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If you’re looking for ways to finance your small business, you’re in the right place. Here, we’ll be discussing 3 ways to finance your small business, and I’ll be sharing with you the one option I recommend most and why.

You have a business concept or you may have begun to implement a business strategy.  You have your normal personal expenses: water, electric, food, transportation, shelter, and so on.  Now, you have this new idea (or the beginning of this business) and it’s starting to need start up business funding, but where do you get that from?

The Mainstream Advice on Start up Business Funding

Many mainstream resources talking about start up business funding will begin prepping you for a business loan.  They tell you that you need to start “building business credit”.  They tell you to get a secured credit card, buy materials or equipment with in-house credit somewhere, or establish credibility, so you can get a loan.

Alternatively, some mainstream advisors have you thinking about pitching investors.  I mean Silicon Valley is booming, right?  You may think to yourself, “All I have to do is get someone to begin making a business plan (which I talk about here), learn how to set up a website for business and sales (which I talk about here), create a pitch deck, and begin pitching investors, then….BOOM…I have my start up business funding, right?”  But, then, you find out getting start up business funding the loan route and the investor route has its cons.

The Cons of Business Loans

finace your small businessYou’re starting your business so you can have more freedom, right?  When you have debt or someone you have to gain consent from before making decisions in your business, then do you truly have more freedom?  I think not.

With business loans, you get a bill in the mail every month.  The lender doesn’t care that your business didn’t have the expected revenue or sales.  They only care that they gave you the start up business funding when you asked for it, and they want their payments on time.  When you’re starting or growing a business, you have to do several experiments to see what works.  When you have the pressure of owing someone at the very beginning, sometimes, it can push you into making decisions out of desperation rather than because the decision is best.

My Experience With Loans and Debt

I never acquired debt for my business ventures, but I have gotten debt for personal purchases.  I remember when I made my first furniture purchases.  I was a single mom making enlisted Airman pay.  I wanted to have a good standard of living for my son, so I talked myself into using in-store credit to get my furniture.  I picked furniture I really liked, and got it delivered to my house.  Everything seemed great until the bills came rolling in, and life circumstances took their course.

I had the pressure of covering the debt payments regardless of my financial issue.  It was a lot of pressure, and I thank God I paid those furniture loans off!  I had more debt agreements I made in my 20’s before I decided debt is just not a good fit for me, and I would love to relieve you of that pressure.

You can make the best decisions for your business and your customers when you’re business is free of debt.  When you’re worried about making debt payments on time, you can be strongly tempted to act in desperation rather than making the most logical and long-term decisions.

Added Cons of Business Loans

The ideal setup for business loans is you have a lender who has money, he exchanges it with a person who needs money, and the person pays them back in full.  Unfortunately, while you may be very optimistic about the business potential, hiccups come.

You may try rolling out a new product line that just flops or attracting a new target audience that doesn’t catch on.  Things happen!  The business loan arrangement has no sympathy for your circumstances.  The reality of the lender/borrower relationship can have very negative emotional pressures, so I think it’s a method of start up business funding you should avoid.

Added onto the norms, sometimes, interest rates will rise, the economy will change, lenders will change their terms of service, and payments will adjust.  As a startup entrepreneur (or one scaling their business), you need to be able to focus on strategy and implementation.  Worrying about loan repayment can be a huge distraction!

The Cons of Equity Financing

I WAS so attracted to equity financing as a beginning entrepreneur.  I was attracted to the mainstream view of equity financing you see on places like Shark Tank.  It looks like the entrepreneurs who pitch and investor and get a deal have a mentor for life, and they have access to an expanded network.  It looked like bliss to me until I dug deeper.

In their article called The Pros and Cons of Equity Financing, the author talks about how you loose ownership of your business.  If you decide you need to take a vacation or you need a BMW to meet with clients, guess what?  You have to accept the investors input on that.  You’re starting this business for increased freedom, right?

Most of us, entrepreneurs are in business for freedom, flexibility, and control of our destinies, right?  Having an investor can be very similar to having a 9 to 5 boss.

  • You have to be accountable to them
  • You have to explain the ups and downs of the business and submit to their input
  • You have to compromise things you may consider in the best interest of the business you desired to run

What is Bootstrapping and How Does it Count as Start up Funding?

Bootstrapping is using your own money to start and grow your business.  Bootstrapping requires the most creativity of all start up funding options because you may start with $5, $100, or $10,000 you can invest towards your business.  Each see investment amount comes with its individual pros and cons.

Are Bootstrapping Entrepreneurs with a Small Budget at a Disadvantage if they are solely providing their Start up Funding?

Startup entrepreneurs with a small budget often feel that they’re at a disadvantage, but those with large budgets are at a disadvantage also.  I love listening to Daymond John and Mark Cuban talk about the power of broke.  Like them, I believe there is power in starting with a small budget because of how much it increases your creativity.  In his book, The Power of Broke, Daymond John talked about how much more cautious you are when: (1) It’s your money, and (2) You don’t have a lot of it.  You tend to be much more careful with a smaller budget.

Warnings for Bootstrapping Entrepreneurs with A Big Budget for their Start up Funding

Thomas Stanley speaks about the detrimental mentality of those who have a big budget in his book The Millionaire Next Door. I recommend you checking out his book whether you have a big or small budget because it will help you to create the necessary mindset and habits to partake in the bootstrapping journey.  Any form of start up business funding has its challenges, but bootstrapping is definitely not for the faint at heart!

What does Economic Outpatient Care, Spoiled Children, and Borrowing Business Owners Have in Common?

Haven’t you seen the spoiled child?  The one that knows there’s no consequence for their behavior?  The spoiled child knows their parents will take the brunt of the consequences, so they can “do what they want” for the most part.  This “spoiled child” syndrome can translate into financial dependence and Thomas Stanley calls these dependent people recipients of “economic outpatient care”.

Business owners who begin with loans or equity financing (especially if they acquire them prior to a strong proof of concept), find themselves demonstrating the same unhealthy behavior patterns as the “spoiled child”.  They may not ever learn how to balance their business tasks with the correlating sales/revenue outcomes.  When a business owner stays in the cycle of recruiting for funding rounds because they’re not able to creatively plan, then you build huge behemoths of businesses that eventually need bailouts and so on.  Don’t build a business that always relies on economic outpatient care!

The Benefits of Bootstrapping For Proof of Concept

While bootstrapping may not be the easiest option for a startup entrepreneur (or some may say), it pays off with freedom and liberty once the cashflow starts rolling in.  Unless you go public (which typically means you have shareholders and you’re using equity financing), you won’t have to consent with so many parties before making business decisions.  You can hire consultants (like me) to give you more input on your business, but you ultimately choose what you’re going to do.  There’s so much liberty in being able to make your business choices without a mega hierarchy or something of such.  You won’t have the pressure of debt invoices coming in, and requiring payment.

Bootstrapping also gives you a chance to try the venture out without feeling obligated to stick with something if you find out you don’t like it.  Proof of concept is a must!  With bootstrapping, you can prove whether the idea you had works in the market and whether you like working it in the market.  You want verified proof that the market has a demand for your product/service, and you want proof that you’ll enjoy being the solution.  When you let lenders and investors come in too early, you can get stuck in a field you may not like because you feel obligated.

The Cons of Bootstrapping

Bootstrapping requires lifestyle changes (especially if you are starting with a small budget).  You may have to be creative about how to cut your grocery budget, you may need to increase your savings rate or begin investing, you will be the only one that concerns themselves with your financial independence or retirement, so you will have to check into good investment firms.  Do you get the picture?  You become the captain of your own ship and the pilot of your destiny as a bootstrapper.

My Bootstrapping Experience

finance your small businessThe lifestyle change part can be hard because you have to create new habits.  I’ve done lots of things to cut my expenses and increase my savings and investing rate.  Things like:

  • Freezer cooking – batch preparing meals to cut waste, save time, and increase meal prep speed
  • I’ve replaced disposables with cloth (wherever possible)
  • I got serious about meal planning or hiring it out for as low as $5.00! (you can read more on that here)
  • I’ve had Billcutterz (a third party bill negotiator) negotiate my bills down
  • I’ve side hustled like nobody’s business and I wrote about quite a few here
  • I’ve attended online classes like this one on making over the grocery budget
  • and, I’ve made sure to get better and better at sales

I’ve done many things so I can take expenses down, increase my sales, and leave room for investment into my business ventures (even if the investment amount seemed minimal).  It’s important that regardless of what budget you start with that you’re mindful that it’s finite. Contrary to popular belief, I believe it’s good to place yourself in a scarcity mentality while you’re starting your business, so you are not overspending on all of the gadgets that can supposedly help you.  When your expenses are intact, you can invest more in start up business funding.

Warnings for my Fellow Bootstrapper

Gadgets will come out the wazoo that do this and that, whether payroll or time management, or else.   The scarcity mentality that you maintain should be connected to your budget, which should show you the finite limits of what you have (big or small).  Regardless of what budget you have, you should be intentional, so track your spending and be careful you’re balancing outgoing expenses with incoming revenue as best you can.

While bootstrapping, you have to increase how you track expenses.  You can use something like Personal Capital to help you track your net worth in your business and personal ventures.  This will help you visualize whether you are growing or shrinking in financial health.  It’s such a fine line between profiting and loosing when you’re first starting out, so apps that help you save like the digit app or apps that help you track your budget and net worth like personal capital can be your best friends in this journey.

The Benefits of Bootstrapping for Financial Confidence

There is a confidence you accrue when you know (without the shadow of a doubt) that the ideas in your mind can grow money.  When you know you can take $5 and turn it into $100, $1000, $10000, or more, you sleep better at night.

Many financial independence enthusiasts gain their security from their bank accounts.  They may have one million dollars or more that makes them feel like they are worry free.

In reality, currencies change (which is rare but it happens), economies go up and down, marriages can get ugly, people steal, natural disasters happen, medical bills are high and people get sick, and so many other scenarios can chisel away at the bank account that delivers financial security.

Once you’ve mastered bootstrapping for start up business funding, you can have the confidence that if everything was to be taken away, you can create ideas (by God’s grace) that enable you to re-create what you’ve lost.  Financial confidence stumps financial independence any day in my book, and bootstrapping helps to build the creativity and problem solving skills necessary to build financial confidence.

If you never have to start with nothing, how do you create the confidence that you’ll be okay if you ever have to?

Final Words on these 3 Ways to Finance Your Small Business

If you’re serious about bootstrapping for start up business funding, it’s a journey, and you need all the tools resources, knowledge, and support you can get to make it successful.  It’s like loosing weight, getting out of debt, or other challenging journeys people choose.

Bootstrapping is a character-building journey that adds admiration in your story.  You’ll love all these resources to fuel you in this journey because they’ll help you track your expenses, and help get your wheels turning towards financial confidence.  You’ll thank me later!

Additional Recommended Resources:

If you’re interested in small business financing, then it’s likely, you may want to take a look at these other options as well:

Let’s Open the Floor For Comments, Questions, and Concerns

I know that was ALOT of information.  As always…you get your turn to say what you need to say…

Have you used business loans for start up business funding?  Have you pitched investors or known someone who has equity funding?  What are your thoughts on bootstrapping and start up business funding?

 

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14 thoughts on “3 Most Common Ways to Finance Your Small Business”

  1. Tiffany Denise

    Great article. I heard a lady say that the first rule of business is to use someone elses money, so get a loan. She was saying if you fail you just declare bancruptcy.
    My head almost exploded.
    As a fellow bootstrapper, I say no debt! It is just a hassle.

    I was happy to see you list “The Millionaire Next Door.”
    That is one of my favorite books.
    Thanks again!

  2. Tiffany Denise

    As you are well aware, Tiffany, becoming an entrepreneur is not for the faint of heart. It is, however, for people who love challenges and demand to be captain of their own ship.
    Even small bits of success become very intoxicating and the rewards finally prove the fantastic idea that no one wanted to believe in.
    As a (small) business owner, I am happy when I labor through the days knowing full well that I play a huge part in my success.
    Debt is “economic slavery”. If you give away too much equity in your company and incur a huge debt load you may as well be working for the “man”.
    I agree wholeheartedly with bootstrapping your business because it gives you greater control, grows your confidence and it does force you to become very creative.
    What did you find the hardest to conquer as a business owner?
    How long did it take to feel comfortable with this concept?
    Thanks for this excellent tutorial on “bootstrapping?
    Paul

    1. Tiffany Denise

      Paul, I’m so glad to see you back again!  You asked some great questions, and I had to really reflect on them, but let me tell you my answers…The hardest thing to conquer is myself.  I am still working on this.  On my recommendations page, I mentioned how I use the Google Suite as my second brain, and it’s true.  I can get laser focused on a task and completely loose time: whether it’s a conversation or a task.  I’ve had to become much more intentional with time management as a business owner.  Also, I’ve had to gain confidence and not doubt myself so much.  I think the two things I mentioned are like muscles.  They get stronger and stronger the more you work them out, but you can’t quit working them because you can regress.  Great questions, Paul!  Great to see you again!

  3. Tiffany Denise

    Hi Tiffany,
    Here’s my business experience, 4 start-ups, two by bank loan, one through experience and networking, and now by bootstrapping.
    The loan was the quickest but most stressful. You are absolutely correct that the bank doesn’t care about you, they want their money no matter what. One of the two start-ups was successful, the other went bankrupt, lesson learned.
    The one that depends on experience and networking is still going but runs hot and cold. When it’s hot, it works too well and I can’t handle all the work. When it’s cold, well, never mind.
    The bootstrap is the latest and so far it’s the best way. It’s like building a house. Start with a foundation and build on it. As profit comes in, a little is reinvested to make more money, and so on. No stress trying to pay the bank loan back and no worry about hot and cold, the foundation is always there.
    Thanks for the great article.
    Ed

    1. Tiffany Denise

      Thanks so much Ed for sharing that experience!  Loans or equity funding can be very stressful.  Like you said, bootstrapping is like building a house.  I’ll add to what you said that it’s like building a house on a firm foundation.  Thanks for stopping by, and sharing your valuable perspective learned from hard knocks!

  4. Tiffany Denise

    Thanks for such a great article!
    I have learned to be frugal since starting my online business. Having a loan hanging over my head at the genesis of my business is a weight I don’t need.
    My first business venture was back in 1998 and I used my own investment for this. As you mentioned, the banks are very open to lending you huge sums of money without proper due diligence as to whether your business plan is worthy as they know that if you default on a loan, they are the winners.

    There is nothing more satisfying than starting out with your own capital (as small as it may be) and watch your business grow. With the open internet, there is so much you can leverage that you now don’t need to be paying for some services such as software for email marketing services as there are some free ones available. There is so much information online – and you’ve mentioned some books – that we can become much wiser in funding our start-up businesses.

    I’ve not read The Millionaire next door but I can only imagine what this book is about. 🙂
    What advise would you give to someone who is has money and are just throwing it around – buying into everything that glitters, being wasteful with their spending – before the foundation for their business has been set?

    Thanks
    Jackie

    1. Tiffany Denise

      Great question Jackie! Money is a reflection of the deeper inner workings. It can tie into so many things. It can tie into a person’s feeling of neglect, insecurity, or so many other identity issues. With that being said, I would advise them to begin tracking their spending and self reflecting. They need to identify why they are in the cycle of waste, and willfully change that choice. Once the begin to track their spending, and they identify their spending as a limitation when bootstrapping their business, they should challenge themselves to cut portions of what they spend from different line items on their budget. Once they have cut expenses to a point where they have enough to pay their bills, maintain an emergency fund, and to bootstrap their business, then they should decide whether they still want to cut more, or if they can persevere as is until the business begins returning on their investment. Thanks for the question!

  5. Tiffany Denise

    Thanks for this article, does this cater even for affiliate marketing? I would love to learn more, I am in Italy and sometimes things are different from country to country but I like your suggestion of starting your business with your own income.

    That is what I have done, it is not easy but it is achievable.

    Thanks

    1. Tiffany Denise

      Hello Cinderella! Bootstrapping is an option for start up business funding regardless of where you are. It’s using your own money to start a business. I’m not sure how mainstream that concept is in Italy, but here, many banks have business departments, and most of those are encouraging loans and credit. I have yet to find a business department that is teaching personal finance, so entrepreneurs can make room in their budgets to bootstrap a business. You’re right that bootstrapping is a challenge, but it is a worthwhile one in the longrun. Thanks for sharing your perspective on this!

  6. Tiffany Denise

    Hi Tiffany,
    I’m also an advocate for bootstrapping as Plan A, although it isn’t necessarily the right choice forever. Also, there are sometimes options for a fourth color of money, grants and prizes. Local (city / state) economic development organizations, and others who want to gain attention of small businesses, organize pitch competitions, business plan competitions, and grant cycles for particular types of entrepreneurs they want to help. I’ve got a list over on my blog (hopefully it’s not rude to share it here): http://fourcolorsofmoney.com/business-plan-competitions-us-businesses/

    1. Tiffany Denise

      Thanks for sharing Don! You mentioned that bootstrapping is not the best choice forever. Are you suggesting that at some point entrepreneurs should change focus from internally pushing business revenue and increasing sales goals into something else?

  7. Tiffany Denise

    Hi Tiffaney,

    It was great coming to this website. I’m so happy to have read this article. You really wrote like someone with much of experience when it comes to starting a business. And I appreciate your advise very well.

    My question is, if I want to start my personal business which does not require paying that much money to get started, which one will you recommend? I will appreciate your reply.

    Thanks so much for sharing.

    Stephen.

    1. Tiffany Denise

      That’s amazing Stephen! I think you should start tracking your personal finance expenses, and begin leaving room to invest in your new business. I’m cheering for you!

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