What Are Some Common Ways to Get Funded?

The typical ways entrepreneurs use to fund their businesses are personal savings, partnerships, pre-sales, donations and credit. They are the preferred method of funding because they help you get off the ground without ever having to take money from a third party. They are the old “DIY” version of funding your business. Even if you do end up needing to raise more money to grow your business, getting as far as you can on your own is beneficial for many reasons. You retain control, ownership, and you’re responsible only to yourself. As soon as you have someone else’s money, that whole dynamic changes.

Presales

What are pre-sales?

A presale or pre-order is a targeted sale before your product actually goes live. You sell the idea of your course to a small portion of your audience BEFORE you've created all of your course content. It is a great way for businesses to spark interest about new products, plan for inventory management, and raise money for production.

How can you pre-sale your products or services?

Typically, you presell by setting up your sales page, discounting your course, and sending an email out to your list.

Presales allow you to create a course catered to your audience, work out any silly mistakes, and ensure that you’re selling the best product that you possibly can. Here are some guidelines for what steps you an take to run a successful presale for your business.

1. Decide to presale

2. Find your target customers

3. Create your sample product or service

4. Create a sales website

5. Promote your pre sale to your target customers

6. Collect feedback

7. Respond to feedback

   • Improve your product

   • Launch your business

What are the advantages of pre-sales?

Pre sales reduces the possibility of failure cause it allows you to collect feedback to change and improve your produce. It also tells you information about how much your customers are willing to pay and may influence you to charge more with a better course for your fully priced launch. Pre-selling also speaks to demand.

What are the disadvantages of pre-sales?

On the flip side, if only a few people are interested and your idea does not seem profitable, you will need to refund them their money.

Partnership Funding

What is partnership funding?

Generally, a partnership is a business owned by two or more individuals. There are three forms of partnerships: general partnership, joint venture, and limited partnership, check out Rules and Regulations to find out more about the legal details.

How does partnership funding work?

A successful small business partnership requires short-term mutual interest and long-term compatibility. You need compatible values and vision, compatible financial resources and expectations, and compatible goals. The best small business partnerships involve some give and take. But under the stress of building a new business, differences that at first seem quirky or even complementary can turn into major rifts. You and your small business partner don’t necessarily need to make an equal time commitment to the business venture, but you do need to know from the beginning what to expect from each other. Outline your expectations for your partner’s time so that you can identify any disparity between expectations and reality.

How can a partnership help me get money to fund my business?

You’ve heard a million times that “it takes money to make money.” When you’re in a small business partnership, that truth presents additional questions: Who will be contributing financially? How much capital will be expected from each partner? When does that investment have to be made? Keep in mind that while the specifics of who will contribute what financially are important to your partnership agreement, financial resources alone are not a worthwhile reason to bring in a small business partner.

What are some advantages of partnership funding?

All partners share in the profits, managerial responsibilities, and liability for debts equally. Your partner will help with the financial burden, decision making, workload to develop the business.

A partner will typically have better terms to provide “funds” for the business than a bank.

What are some disadvantages of partnership funding?

A partnership adds another opinion and say to decisions made for the business, which means you will no longer have full control and authority.

Pro Tip

Keep in mind that if financial capital is all your partner is bringing to the table, then he is not a business partner — that’s an investor. Make sure you understand the difference, and structure your business relationship accordingly.

Personal Savings

What are personal savings?

Personal savings are the money that a person, rather than a business or organization, keeps in an account in a bank or similar financial organization.

What are some advantages for using personal savings?

Using your personal savings is the easiest and most cost-effective way to provide your own financing for a new business.

You will know exactly how much money is available to run your business and you will not have to spend time trying to secure other forms of funding from investors or banks.

Self-financing your business gives you much more control than other finance options. It also means that you don't need to pay back or rely on outside investors or lenders, who could decide to withdraw their support at any time.

You will retain full ownership of the business, which in turn means that you will receive 100 per cent of future profits.

If you fund a business yourself, you will be forced to live within your means, only investing in business equipment and marketing when you need to. This can help you to prioritize your business expenditure and avoid excessive spending.

What are some disadvantages for using personal savings?

Using your personal savings can be risky, and you may not have enough to cover all the funding you need. 

Mixing personal and business funds can cause accounting and tax issues.

Using your own money to finance your business may put a strain on your family and personal life. You may not have enough money left over to cover your living costs.

If your business were to fail, you could lose your home and other personal possessions.

If you fund your business alone, you will have to develop your own contacts and mentoring opportunities.

Pro Tip

Once you’ve stretched your budget as far as it goes, consider explore other options for financing your business.

Don’t completely drain your savings. This is money that you have saved up for your future and for rainy days – using all of it can put you in a very precarious situation if something goes wrong.

Give yourself a cap. Some financial advisors say to leave yourself at least $5,000, which is a good rule of thumb, although if you have a lot of money in savings it might be better to keep the number at no more than 50% of your savings.

Donations

What are business donations?

Donations are free contributions and they can come as monetary donations, volunteer time, or anything else that might be helpful to your business.

How can you get donations to fund your business?

Regardless of what you’re asking for, asking for donations can be an intimidating prospect. Asking businesses may seem even more intimidating. Tailor your approach to the person you're asking, craft a formal letter, and meet with them in person to discuss your project and the reasons their business should donate. Speak with other local businesses, local churches, charities and nonprofits about grants and contributions. If your business will provide a valuable service to the community, you will likely find that many in the community will be willing to support your effort. Below, we’ve drafted some tips to help you be successful in your ask.

1. Determine which companies you should ask. A good place to start is businesses in your local community. 

2. Find a point of contact. As easy as that would be, you have to form relationships with leadership members within the company you’re asking for donations from.

3. Think about what you can offer in return. Depending on your existing relationship with the company, how much they donate, and your available resources, this could take a multitude of forms:

   • Logos and names on banners at events, '“sponsored by ….’

   • References in newsletter, website, social media

   • Tax benefits

4. Make the ask! There are a couple of ways you can go about asking for donations:

   • Write a letter. This method lends a bit of formality to the ask. Limit your letter to one page, and make sure that someone in your organization signs it (preferably a board member or other leader).

   • Ask in person. This method is sometimes preferred by nonprofits who are asking local businesses for donations. Asking in person can be tricky, especially if the person you’re trying to meet with already has a busy schedule. But meeting face-to-face can also help you perfectly spell out your appeal and answer any questions head on.

5. Follow up. Sometimes, a company won’t write a check or make a donation after the first letter or meeting. So you should follow up with your point of contact a couple weeks after. Your follow up can be less formal than your initial meeting. You could:

   • Give them a phone call

   • Send an email

   • Have an informal in-person meeting

   • Send a check-up letter

6. Say thank you. We can’t stress the importance of gratitude in the fundraising process enough. Acknowledging donations is even more critical when it comes to receiving corporate funds or in-kind contributions.

What are some advantages of donations?

Donations are a great way to fund your business because they are grants, or ‘free money’, that you do not have to pay back.

What are some disadvantages of donations?

Pro Tip

Try not to limit donations to cash. A local church or business may be willing to donate the use of a building for your first year of business. A local charity might be willing to offer manual labor necessary for your opening. Or a local school might be willing to help organize a coupon drive to generate advance sales before opening day.

Small Business Loans

What are small business loans?

Loans are exactly that, money you borrow from someone else in the form of personal loans and and bank loans. These forms of funding rely on three major concepts: risk assessment, leverage, and your ability to pay off a debt.

• Small Business Administration Loan. The SBA works with lenders to provide loans to small businesses. The agency doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. The SBA reduces risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans.

• Business Term Loan. With a traditional-term business loan, you are lent a lump sum amount upfront, which you pay back (along with fees) over a set period of time.

• Business Line of Credit. With a business line of credit, you can borrow up to a maximum credit limit and only pay interest on the amount of capital that you borrow from your credit line.

• Personal Loan for Business. Personal loans can actually be helpful for newer businesses that don’t have any financial history. Plus, personal loans can have lower rates than business loans.

• Invoice Financing. Invoice financing lets you sell invoices to a lender, who fronts you a portion of the invoice amount. The remaining percent (usually 20%) is held until the invoice is paid.

• Startup Business Loan. Startup loans offer newer businesses capital to grow. Business credit cards, lines of credit, and equipment loans are great startup loans if you have strong personal credit.

• Equipment Financing. With equipment financing, the lender will front you cash to help purchase the equipment outright. You then pay back the total amount lent, plus fees, for a set period of time.

• Short-Term Business Loan. With a short-term small business loan, you are lent a set amount of capital upfront, which you quickly pay back (along with fees) over a short period of time.

• Merchant Cash Advance. With merchant cash advances, a financing company fronts you a lump sum of capital, which you repay (plus their fee) with a set percentage of your daily credit card sales.

Before we get started, learn about many other small business loan options and the advantages and disadvantages for each! Click the lnik on the right to copy the Google Sheets file to your Google drive.

How do you apply for and get small business loans?

1. How much do you need. Figure out exactly how much money you need and when you’ll need it by.

2. Prepare and have a business plan. This will help you demonstrate knowledge of your industry, be able to articulate the opportunity you’re going after, and highlight your competitive advantage. You should also have a firm grasp of what you plan to use the money for, and how this investment will impact your bottom line.

3. Check your credit. Your credit is an important indicator of your creditworthiness. Request a copy of your personal credit report and score. Contact the credit bureau to resolve any issues, and if your score is in the 600s or lower, take steps to improve it before you approach lenders.

4. Educate yourself and research whether you actually qualify for a loan. There are 5 C’s of Credit used by lenders industry-wide to determine the creditworthiness of potential borrowers.

   • Character: What is your reputation and track record for repaying debts?

   • Capacity: Do you have the financial ability to repay the loan?

   • Capital: How much “skin” in the game do you have? If this business fails, what do you lose?

   • Collateral: What assets can you pledge to support your loan?

   • Conditions: What are the large circumstances surrounding your business?

5. Ask about the terms. Here are some thing you should be asking:

   • Interest rate (or other applicable rate like AIR, APR)

   • Upfront fees, where do they go? Some typical fees are used for origination, application and guarantee.

   • Loan term, or lifetime

   • What is the full cost of the loan over its lifetime?

   • Payment amounts and frequency

   • Prepayment penalties

   • Check processing penalties

   • If going through a broker, do they have or are they disclosing their fees?

   • Speed, how fast will you get access to the funds

6. Prepare your documents

   • Business bank statements

   • Many lenders will want to see your balance sheets or “statements of financial position.”

   • Profit and Loss Statements, also known as your Income Statements.

   • Some lenders are going to want to know if you currently have business debt and if you do, the weekly or monthly payment details of that debt

   • Most lenders will want to see your most recent personal tax return to verify your income

   • Most lenders will want to see your business tax returns from the last two fiscal years.

7. Prepare your investor pitch

8. Apply and wait for a response

9. Choose to accept or decline your loan. Ask yourself:

   • Can I repay this loan?

   • Am I comfortable with the payment, whether it has daily, weekly, or monthly payments?

   • Can I confidently say this is the lowest rate I will find?

   • Do I know all potential fees associated with the loan?

What are some advantages of small business loans?

With a small business loan, you maintain full control of your business and any potential profits. Small business loans will help yo grow and expand your business without any hassle, so you have financial flexibility for your daily operations.

What are some disadvantages of small business loans?

A lender may require that you put up some form of security to obtain the loan. You face the possibility of losing not only your business, but also your home, car or other property.

You may be required to adhere to certain restrictions during the course of the loan.

They are difficult to obtain. Many lenders are leery of lending money to upstart businesses and will lend money only to established entities that are in a solid financial position.