How to Finance a New Business: 8 Steps (with Pictures) (2024)

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Co-authored byHelena Ronis

Last Updated: September 22, 2021References

1. 1

   Determine your financial need. Figure out exactly how much money you need before you invest your own money or ask for others to fund your business.

   • Research other businesses like yours. What financial advice can you find out? What do experts say is the minimum about you need to start a business like yours in your area?
   • Anticipate future needs to avoid a financial crisis. For example, what happens if your business doesn't turn a profit for several months? Is your business seasonal and, if so, how will you make ends meet during the off-season?
   • Make sure your financial need matches your business plan. Your business plan cannot be more ambitious than your financial plan. Remember that you will need to finance whatever you promise in your business plan.
   • Make a list of everything you need to start your business. Do you need real estate? What about equipment or special licenses? Get accurate estimates of all costs so that you know how much you need from lenders or investors.
2. 2

   Use your personal savings. Use all or part of your personal savings to fund your business. Deciding how much of your savings to use depends on your level of comfort with risk.

   • The majority of small business owners use personal savings to start their businesses.^[1]
   • Another option is to use part of your 401K. Under the Rollovers as Business Startups option you can borrow money from your 401K without paying taxes on the funds or paying an early withdrawal penalty.^[2]
   • Whether you use personal savings or your 401K weigh the risks against the benefits. If your business fails, for example, you will be left with little to fall back on. On the other hand, a successful business may more than pay back any initial investment.

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3. 3

   Ask friends and family. Borrow startup money from family or friends.

   • Treat this as any other business transaction and have a business plan and repayment plan in place.
   • Be sure to tell family and friends exactly what you need and why. Saying you need money for a business is less convincing than saying you need a refrigerator for your new restaurant. Let them know exactly how their money will be used.
   • You may want to offer a percentage of your business. Family and friends may be more willing to invest if they will have a stake in the profits. Remember that giving away too much will reduce your own profits and, potentially, your control. Giving away 51% means that you do not have control of your own business.^[3]
   • Defaulting on a loan from family or friends can ruin relationships so use this option wisely.
4. 4

   Get a bank loan. Banks lend money to people starting small businesses and those who want to expand existing businesses.

   • Banks can loan large amounts of money not available from sources such as microloans.
   • Know your credit score. Bank loans require strong credit. Check your credit report before approaching a bank and fix any errors.^[4]
   • Have sufficient collateral.^[5] Collateral may be needed to guarantee your loan. If you do not have sufficient collateral within your business the bank may place a lien on your house.^[6]
   • Create a realistic budget based on financial statements and projections for your business.^[7]
   • Know why you need the money. Banks are more likely to lend for reasonable expenses such as purchasing equipment but are less likely to lend for other reasons such as a cash flow problem.
   • Build a relationship with your bank before asking for a loan. The more they know you and your business, the more likely they are to approve a loan. For this reason it is better to use a bank where you are already a customer.^[8]
   • Use a local bank or Credit Union and take advantage of loan programs guaranteed by the Small Business Association. Banks may be more willing to lend if the loan is guaranteed by the government. Local banks are more likely than larger, national banks to fund small businesses.^[9]
   • Give the bank all documentation requested. Loans are denied because of incomplete applications. Make sure all documentation is complete and organized.
   • Ask how long it takes to get approved and have the funds disbursed to you. This process can be lengthy (as much as 60 days). You will need to plan your business start up with this timeline in mind.
5. 5

   Obtain credit cards. Exhaust other options first. Credit cards can be a viable option but carry risks.^[10]

   • If you have strong credit, you may qualify for lower interest rates.
   • Limit yourself to short term purchases if you have weak or mediocre credit.
   • Research different credit card options. Look for low interest rates, balance transfers, reward programs and other benefits.
   • Business credit cards may come with higher credit limits and can aid in managing your business finances by keeping business expenses separate from personal expenses.^[11]
   • Inability to pay the full balance each month can cause you to pay much more for purchases.
   • Credit cards are an easy way to increase debt and damage your credit score.

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1. 1

   Use a crowdfunding site. Raise money without risk and promote your venture at the same time.

   • Crowdfunding sites allow you to pitch your business to an online community of investors and raise funds to achieve a particular goal for your business.
   • None of your own money needs to be invested but if you don't reach your goal, you may not get any money at all.
   • Start by advertising in your local area (newspapers, local television). Crowdfunding relies on word-of-mouth and this is a good way to start to build interest.^[12]
   • Create a passionate and engaging pitch. Why should people invest in your business? What do you offer that others don't? What makes your business exciting or innovative?
   • Set funding goals that you expect can be met and do not over-promise on deliverables.^[13] If you need a large investment consider breaking up your goal into parts. For example, instead of asking for money to purchase enough equipment to outfit a restaurant, ask for funding for certain items like a new walk-in refrigerator and a stove. Once that goal has been met you can ask for funding for other items (tables and chairs, a deep-fryer).
   • Research successful crowd funded campaigns. What did they do that got them noticed and funded? What did they offer potential investors? You don't have to reinvent the wheel -- learn from others who have been successful.
   • Identify your target audience and tailor your pitch to attract investors. Who is likely to invest in your business? What kind of person would be attracted to what your business has to offer? Make a list of several potential audiences and then decide which is the most likely to fund your business. You can even check crowdfunding sites to see who has funded businesses like yours. Tailor your pitch to this audience.^[14]
   • Choose the right crowdfunding site for your needs. Some crowdfunding sites specifically fund small businesses (as opposed to artistic projects, for example). There are crowdfunding sites that are linked to causes such as environmentalism. These sites can link you with investors who share your cause, instantly connecting you with a target audience.^[15] Well-known crowdfunding sites include Kickstarter and Indiegogo.
   • Be aware of any pitfalls with a crowdfunding site. Will you be penalized if you don't reach your goal? Is the site attractive to potential investors and is it easy to navigate and customize for your needs?
   • Many crowdfunding sites allow you to choose a timeline for your campaign. Make sure to pick a time frame that will allow you to reach your goal.^[16]
   • Remember that crowdfunding sites take a percentage of your donations. There are also fees for processing the credit cards of your funders. You may end up receiving 7% to 12% less than you actually raised. Fees vary by site.^[17]
2. 2

   Get a microloan. Microloans are small short-term loans that can help you purchase equipment and other supplies to start your business.^[18]

   • Microloans serve many people who can’t access financing from traditional avenues due to lack of credit history, damaged credit, bankruptcies or lack of collateral.
   • Most microlenders are nonprofit organizations and provide one-on-one technical assistance.^[19]
   • Microloans can help improve your credit rating, making you more likely to be able to qualify for a larger bank loan.
   • Locate a microlender in your state. Some microlenders only lend in one state but some lend nationwide.^[20]
   • Prepare a business plan and financial statement describing why you need the loan.
   • Although microlenders are less strict about credit ratings than regular bank lenders you may still be asked to provide previous years tax returns or other personal financial information.
   • Have personal and business references available. Some microlenders want references who can speak to your ability to run a small business. Ideally, your references should know you well and be able to give specific information about any previous experience, education or training that demonstrates your readiness to start your own business.
   • Microlenders can take as long as banks to approve and disburse loans. Plan on at least 60 days before you receive any funds.^[21]
3. 3

   Investigate equity financing (also called Angel/Equity Investment). Avoid taking on debt by providing investors shares in your company.

   • Investors can dilute the control you have over your business and leave you with a smaller share in the profit.
   • Finding Angel investors can be difficult. One place to start is with online lists such as Forbes.^[22]
   • Attend local showcases and events for entrepreneurs to meet Angel investors.^[23]
   • Prepare a pitch for your business and be prepared to discuss your business plan with many potential investors.
   • Do not be discouraged if the first few people you approach turn you down. Persistence is the key to Angel investing. You need to find the right person, at the right time.
   • Some Angel investors work together, each putting in a portion of the money you request. Decide how you will handle multiple investors: Will each individual get a percentage of your company? Will the group get a certain percentage? How much control are you willing to give up to have your business funded?
   • Do your homework. You want to approach Angel investors who are likely to fund your type of business. Local trade groups or industry associations may be able to link you with Angel investors who share your interests.^[24]
   • Expect Angel investors to take the time to research your business before making a decision. This can take several months.

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