One of the most challenging aspects of starting a business is funding. Many believe there are grants and loans that will cover all these expenses. Unfortunately, without a business history, credit or money, it can be difficult to obtain any loans for a startup, especially if you have never owned a business. Grants are typically for non-profits and difficult to find for a new business.
Entrepreneurs are way too optimistic according to Christopher Mokwa and Soenke Sievers, researchers from the University of Cologne. They examined 176 startups and learned how overly optimistic startup founders can be. Overall, management projections for expenses, revenues and profits are significantly inflated across a one- to five-year horizon. The revenue projections were the worst. On average, entrepreneurs think their revenues will be 388% higher than they actually turn out.
Funding your own growth is one way to avoid taking on debt. Very few small businesses are profitable their first few years. What money is made is often put right back into the business, leaving some unsuspecting entrepreneurs without a salary. Below are a few ways you can fund your business.
Keep your day job: Many are turned away from loans because they quit their day job to start a business and don’t have a guaranteed way to repay a loan. Keeping your day job can help you alleviate financial stress while growing your startup. Your focus can be on getting through the difficult early days and the surprises that come along with it.
Friends and family: Asking for help from those that already know and like you is how many kick off their startup. These people are already invested in you and would like you to succeed. If you go this route, make sure you have a contract written up and determine if they will get shares in the company, loan terms or if they want nothing in return. Let them know that there is risk involved and that they could lose their investment.
Pitch contest: A pitch contest is an opportunity for entrepreneurs to present their business ideas to a panel of judges in hopes of winning a cash prize or investment in their business. Besides funding, you can gain exposure and validation of your business idea. Additionally, you will meet other entrepreneurs, business professionals and, of course, potential customers — all valuable for your entrepreneurial network.
Reevaluate your business idea: While a brick-and-mortar store might be nice, it also may come with a high price. Monthly rent and utilities, multiple types of insurance, fixtures, payment processing, signage and employees are just a few of the expenses you might have. Consider starting your business online at home and fund your growth and move to a retail space once profitable. I had one small business client that wanted to open a restaurant but had little capital. He ended up with a push cart and was able to earn enough to buy a food truck.
With creativity, you can find a way to fund your startup.