One of the most common reasons people give for not starting their own business is a lack of funding. The problem with this argument is that 99% of the time, these same folks have not completed a thorough business plan in order to determine exactly how much capital they need!

Planning

It is impossible to decide whether a startup is too expensive, or even viable, without digging into the details of the business idea and creating a virtual roadmap of how the venture will operate. Entrepreneurship at its finest is akin to the classic construction adage – Plan the Work, Work the Plan. Once a complete sketch of a startup is developed, it is far easier to find ways to modify the idea for cost, identify opportunities to reduce, eliminate, or delay expenses, and clarify exactly how much will be needed and when. In addition, a well-thought-out business plan will open doors to accessing cash, as the entrepreneur will be in the best position to convince potential investors of the virtues of their particular startup.

Working through the details of a business idea requires researching and considering all the options available for handling every aspect of the startup. Whatever vision of the business is already established, the process of looking at the alternatives is likely to drastically change the ultimate creation. From location (commercial property or homebased) to product line to target market, it is rare for an entrepreneur’s initial assumptions to be spot on. And, depending on their flexibility and urgency of desire to launch their own business, researching the industry, market, and logistics will provide a wide price range of opportunities to get off the ground. That is, a big idea can almost always be broken down into smaller starting blocks that will fit with the time, effort, and cash available for launch.

Informal Investors

Once a definitive startup budget is established and justifiable, securing funding is far easier than most entrepreneurs expect. In most cases, self-funding is a viable option, at least to some extent. Under pressure, most people can scrape together 5K or 10K, especially if the payoff is the freedom and opportunity to work for oneself. If not, a thorough plan provides the tools needed to convince family and friends to chip in, especially if a professional approach is taken in the process. Formal, written requests for funding should include details on the terms sought – a range of loan amounts, reasonable interest rate, realistic repayment plan. It can be a good idea to offer ranges for each term to provide the investor a sense of control. Once the deal is made, all terms should be formalized in writing and each party given a copy. Handling the process in such a manner will convince your potential investors that the proposal is well thought out and thus is more likely to be legitimate.

Formal Investors

For some businesses, the capital needs will far exceed what can reasonably be raised through self, friends, and family resources. In these cases it is critical that the owners’ personal financial affairs are in order. Specifically, the credit score must be excellent with limited debt and the owners must be prepared to personally guarantee every investment. Then, there are two routes to financing – through private investors or a bank.

Private investors will typically require a significant portion of ownership (very often more than half). Thus, owners seeking significant funding (over 100k) should expect that they will not be in charge once the financing is secured. Venture capitalists and private investors put money in to businesses that they believe will have a high payoff relatively quickly and are not afraid to put proven executives in place to make sure that happens. And, in case the business fails, these investors will have first rights to any assets, usually up to or three times their original investment.

Bank loans are just about impossible to land for a startup. An SBA guarantee can definitely help, though they are not particularly easy to secure either. However, if a business idea requires an unusually high amount of capital AND the owners have nearly perfect personal credit, the SBA is an excellent way to go. Without an SBA guarantee, most entrepreneurs end up with a personal loan secured by personal assets – not the greatest option if risk is a heavy concern. If the SBA programs are an option, it is important to check into the requirements before planning the business. Be sure all owners meet the minimum requirements and that the venture’s plan fits with any limitations on how the loan is used.

So…

The first priority is still to plan the work. Without a clear vision of the company and a detailed accounting of what it will take to get there, concerns about how to finance a startup are completely moot. Good ideas should be developed through planning without regard for where the capital will come from. A convincing, justifiable plan will be easy enough to finance through one route or another when the time comes.

Start here. Go far. LaunchX.com.