Funding a Startup Business

You have always wanted to start your own business and now you have decided to go for it. But, you need capital. What are your funding options? 

Your first step is to consider how much money you need and when you need it. This will help determine which sources of capital may be available. 

You should also consider creating an operating capital reserve. A manufacturing operation that is labor and raw material intensive will need more capital to start than a home-based graphic design business. Keep in mind the day you “cut the ribbon” on your new business is not the finish line, it is the starting line. To be best positioned for success, plan for a cash reserve from the beginning.

Funding Sources
The two most common categories of funding sources for startups are equity and debt. Equity sources for startups include personal savings and funding from family and friends. According to a study performed by the Kauffman Foundation, 30% of startup businesses are funded by personal savings with an additional 6.3% of funding coming from family and friends. And 34.9% of capital needed for startups comes from commercial lending through a bank or other lender. In NH, “other lenders” often include regional economic development corporations.

Before we go further, let’s address a couple of elephants in the room. Grant opportunities are exceedingly rare and are only applicable in specialized circumstances. Crowd funding success is realized by a small percentage of startups. Also, outside professional investors, such as venture capitalists and angel investors, seldom invest in businesses that are in the idea, concept, or pre-revenue stages, and are not likely a viable option formost startups. 

Equity Funding Sources
Equity in a business is measured as the percentage of ownership for each owner of the business. If you fund 100% of the business from your own personal savings, then you are a 100% stakeholder in your business and you own 100% of the equity. Equity financing is when a percentage of ownership in the business is exchanged for capital for the business.

Be careful when taking on equity financing as a startup. When you give up equity in your business, you are also relinquishing a measure of control to the funder. An entrepreneur often decides to be a business owner so they can have control, and giving up a portion of that control can be difficult. 

Personal Savings 
Personal savings includes cash and marketable securities that can be liquidated, including 401k or IRA retirement savings and insurance policies that may have a cash value (remember that these options may incur penalties and have limits and tax implications). Consider your personal situation as you plan to support your business. Are you single with no dependents and starting that graphic design business out of your home? Or are you responsible for other humans and starting the manufacturing enterprise that will need more capital? Consider the consequences of your choices on your life and your family. 

Friends and Family
As you consider equity investments from friends and family, keep in mind your tolerance for what measure of control you are willing to give up and what method of establishing value will be used. 

Ask family and friends to take a debt position as opposed to an equity position. This allows the friend or family member to support the startup business owner while creating less complexity in their relationship.

Venture Capitalists & Angel Investors
Equity financing from a Venture Capital, or VC, firm is a rare occurrence. VC firms are made up of a group of professional investors that are typically industry specific. Their sweet spot is technology-focused businesses and high growth industries. 

Angel investors are wealthy private investors who seek to use their own funds to take an equity position in early-stage startups. Angel investors often are more inclined to invest in businesses that are in their own specific area of interest. 

Venture capital and angel investor funding is rare as a source of startup capital.

Other Sources of Equity Funding
Some other sources of equity funding include offering an interested investor royalty fees on future projected sales in exchange for an equity investment and the sale of stock in a company directly to the public market or through filing an initial public offering (IPO) with The Securities and Exchange Commission. 

Debt Funding Sources
Unlike equity funding, debt funding is a loan that is provided with the intent of it being repaid to the provider of the funds. Debt funding can be secured (collateralized against an asset )or unsecured. 

Personal Credit Card Debt
When used responsibly, credit card debt can be a great source of startup capital. However, please consider these cautions: 

Open a new card that will only be used for business expenses. Commingling business and personal expenses may get you into legal trouble. 

Make sure the credit card that you choose has an introductory period with low or 0% interest. Be aware of when the introductory period expires and plan for how you will pay down or refinance the credit card debt before the interest rate jumps up. 

Friends and Family Debt
When seeking friends and family funding, think about how to protect your relationships. Offer a percentage rate return and a stated term to repay the friend or family member, and an attorney should draft the terms of the loan.

Home Equity Loan
If you have strong personal financial assets, a good source of startup capital is cash from a home equity loan or from a home equity line of credit (HELOC). The interest rates on home equity loans are typically lower than a commercial loan from a bank and are lower than a credit card.

Bank Loan
It is possible to access bank financing for a startup business, but you will need to have strong personal finances and a good credit score. If you are purchasing fixed assets, such as real estate, vehicles or equipment that can be used as collateral for the loan, a bank may consider financing those purchases. 

All commercial loans require a personal guarantee, which can be supplemented by collateral in other assets that you may have, such as a home or land.

Government-Guaranteed Bank Loan
A bank loan may also be supported by the Small Business Administration (SBA) or other government guarantee programs such as the U.S. Department of Agriculture (USDA). In the case of an SBA backed loan, the SBA guarantees a portion of the commercial loan so the bank does not take on as much risk. 

Although SBA guarantees are a more common component in lending to an existing business, SBA microloans can be used to fund a startup. These loans are usually under $50,000. In NH, some of the regional economic development corporations serve as microlenders and entities such as Ascendus provide SBA guaranteed micro loans.

Some microloan providers are mission based and look to make loans to specific populations. For example, Regional Economic Development Center (REDC) has a fund for New Americans. Microloans may have a slightly higher interest rate because they are higher risk, but they are a good option for smaller startups or solo entrepreneurs who cannot get bank financing.

SBIR and STTR Government Grants
SBIR and STTR, Small Business Innovation Research grants, are a federal program with non-dilutive grant funding for new technology and innovation-based startups. Federal agencies award businesses funds to develop technology that will advance the agency’s core mission. The largest single provider of SBIR grants is the U.S. Department of Defense.

The NH SBDC partners with the University of NH’s UNHInnovation program to help businesses understand their eligibility and submit proposals for SBIR funding. If you are developing new technology or innovative services, this may be an option for startup funding.

It can quickly become confusing as to which funding option might best for you. Reach out to the NH SBDC to ask for assistance from a qualified business advisor who can discuss your needs and assess the best funding options for your startup.

Edward Miles is seacoast regional director of the NH Small Business Development Center, which provides advising and educational programs to 3,000 small businesses in approximately 200 NH communities annually. For more information, visit nhsbdc.org.