Funding a Small Business: How to Set Yourself Up for Success
🕐 Read Time 5 Minutes
“Money makes the world go ‘round,” right?
This saying especially holds true when starting a small business. Securing funding is one of the most critical steps for any aspiring small business owner; it lays the groundwork for turning your vision into reality and ensures you have the resources to sustain your business in its early stages.
Saving, finding investors, or taking a loan—how you choose to fund your small business depends on what’s right for you. With a solid financial plan in place, you can allocate your resources wisely, avoid unnecessary debt, and set your business on a sustainable path from the very beginning.
Saving: The Foundation for Your Business
Savings are often the most straightforward and low-risk way to fund a small business. By using your own resources, you can avoid debt while retaining full ownership and control of your business.
Unlike investor funding or loans, savings come with no strings attached; you have the freedom to make decisions for your small business independently. This can reduce some of the financial stress of starting a business and allow you to focus more fully on growing your business.
Starting a business with your own savings also demonstrates financial discipline and commitment, which can be attractive to potential investors down the road (if and when you decide to get investors involved in your financing).
While building a dedicated savings fund for your small business can feel daunting, it’s achievable with some strategic planning. Follow a budget and cut out the non-essentials—review your spending habits to help you identify areas where you can save. You can determine how much to save by calculating your business start-up costs, including equipment, inventory, marketing, initial operational costs, and payroll.
Setting up automatic savings is also an effective way to help save up. Designate a fixed percentage of your income to be deposited monthly into a separate account dedicated to funding your business so you can make steady progress toward your goal without even having to think about it.
Don’t forget to account for an emergency fund to cover any unforeseen challenges. You can aim to save enough to sustain your business for at least six months without needing external funding. Having a financial cushion provides peace of mind and flexibility as you navigate the unpredictable early stages of your small business.
Finding Investors: Sharing Your Vision
Sometimes, bringing investors on board can provide the financial boost you need to launch (or later scale) your business. Beyond funding, the right investors can also offer valuable insights, mentorship, and connections to help your small business grow and succeed.
Craft a compelling pitch to secure investor funding for your small business. You can start by creating a comprehensive business plan that outlines your goals, market research, and financial projections. Demonstrate how their investment will be used strategically to build and grow a successful business and highlight the potential for returns. Be confident when delivering your pitch; your business is worth it!
Friends and Family
Asking friends and family for funding is a common first step for many small business owners. With trusted relationships, there’s often less pressure for immediate returns. However, there’s the risk of straining your relationships with miscommunication or unmet expectations, so treat friends and family as you would professional investors by presenting your business plan, maintaining transparency, and keeping open communication.
Angel Investors
Angel investors are individuals who provide early-stage funding (usually in exchange for equity or convertible debt). They’re often entrepreneurs themselves, and they can bring valuable mentorship and connections along with their financial investment. Be prepared to negotiate terms that align with your long-term goals while addressing their need for a return on investment.
Venture Capitalists
Venture capitalists (VCs) focus on funding businesses with high growth potential and typically take higher risks in exchange for higher returns. While they can provide substantial funding, VCs often require significant equity ownership and direct involvement in business decisions. Carefully consider whether their involvement aligns with your vision, and whether you’re comfortable giving up some control and sharing in the decision-making power.
Taking on a Small Business Loan: A Strategic Bridge
Small business loans can be a practical solution if you want to retain control of your business while bridging any financial gaps until you have consistent revenue. Treat loans as a temporary solution rather than a primary funding source, and remember that taking on debt requires careful planning to avoid overextending your finances (also be sure to have a solid repayment plan in place).
Traditional Bank Loans: Bank loans often offer the lowest interest rates and most favorable terms. However, they also come with the strictest qualification requirements, including strong credit, detailed financial statements, and collateral. If you decide to pursue traditional loans, make sure your business plan is strong and you can demonstrate your ability to repay the loan
SBA Loans: Small Business Administration (SBA) loans are government-backed loans that also offer favorable terms such as lower interest rates and extended repayment periods. You need to meet specific criteria to qualify for an SBA loan, including being a for-profit business and demonstrating a need for financing that hasn’t been met by non-government sources.
Microloans: Microloans are smaller-scale loans that are typically offered by non-profit organizations and have lower interest rates compared to traditional loans. These loans of up to $50,000 are a great option for funding specific needs like purchasing equipment and inventory or covering short-term operational expenses.
The Road to a Successful Small Business
Once you’ve secured funding, managing your finances is key to your business’s long-term success. Establish good financial habits early on so you can set the stage for sustainable growth:
Set Up a Separate Business Account: A dedicated business account simplifies tracking expenses, and also makes it easier to determine how long your funds will last and when your business is generating sufficient revenue to sustain itself. Separate accounts also help in tax preparation and maintaining financial transparency.
Create a Budget and Cash Flow Plan: A detailed budget helps ensure that your spending aligns with your financial goals (be sure to regularly review and update your budget as needed). Tracking cash flow helps you identify potential shortfalls early, giving you time to adjust before they become significant issues.
Know When Your Business Can Stand on Its Own: When is your business self-sustaining? Look for consistent revenue that exceeds your operating costs, as well as the ability to reinvest your profits into growth without relying on external funding. Other indicators include stable customer demand, positive cash flow, and the ability to build reserves for future needs. Celebrate this milestone! Your small business has transitioned from startup to stability and is ready to grow on its own terms.
Starting a small business is a journey that requires careful financial planning to pave the way to future success. A financial coach can be a trusted partner in this journey, so you don’t have to go it alone. The guidance and support of a financial coach can help you navigate the challenges of running a small business, and build a strong financial strategy that’s prepared for whatever those challenges may bring.
At Financial Fitness Coaching, we focus on the long-term financial health of your small business to help your business thrive and achieve your goals. We’re having discussions like this in the Financial Fitness Academy every month - we’d love to have you join us! And if you’d like to find out more about how we can help you on the road to success, schedule a free Discovery Call with one of our amazing coaches.