Funding - Overview

February 1, 2023

There are 5 posts in this series:

It takes money, time, and effort to start a business. Some businesses require more than others. A common question that SCORE Mentors are asked is “where can I find the funds I need to start my business?”

The answer to this question varies from one business to the next, as no two businesses are exactly the same. Every startup is likely to find the funding process challenging because every business, whether a startup or an existing business, involves taking risks. In seeking funding, you are asking the source of the funds to put their money at risk with little authority for the day-to-day business decisions (indeed, they are trusting in you to make those decisions wisely).

In general, you should be willing to put your own savings at risk before you ask for funding from grantors, lenders, and equity investors.

Persuading others that the likely return on their money will justify the risk is the primary challenge in seeking funding. Providing detailed information about your plans for the business and your understanding of the market(s) you intend to serve can help reduce the degree of risk that others perceive in your business. On the other hand, doing the research to develop such plans could also persuade you that this business idea is too risky even for you - which is a good thing to discover before you have started spending a lot of money on it.

According to a 2016 Gallup-Wells Fargo Small Business Index survey of small business startup owners:

75% used personal savings
40% used a loan from a financial institution
30% tapped friends and family
30% used credit cards
14% relied on a business partner
10% drew upon home equity (be VERY careful)
3% used crowd-funding sources

Note that many startups use more than one of the above sources of funding.

There are 4 common approaches to funding a startup:

Bootstrapping
Using your personal resources and conducting the business in a “beta” mode to prove the concept, usually before you “quit your day job”.
Grants & Competitions
Funds that do not need to be repaid, but which may come with conditions
Debt
Funds that must be repaid with interest within a specific time period
Equity
Funding that requires a percentage of ownership

A combination of the above may be required over time. However, some sources of funding become easier to obtain as the business develops a history of operations. This history provides objective evidence to support the business plan, reducing many of the perceived risk factors in the business:

The other four articles in this series each describe a few of the above funding sources in more detail.

Additional resources you may find helpful include:

To ask questions and/or learn more about funding for your business, register for a “Funding Your Business” workshop in the SCORE workshop calendar or request to meet with a SCORE Mentor (a free service).

SHARE THIS ARTICLE

Original text