Sourcing Your Start-Up Money

Sobering Statistics

The statistics are sobering; half of all small businesses fail within their first four years.  The number one reason:  underestimating financial needs.  You are well aware of the need for cash to get your business launched, but you must also take into account what may be happening with your business in 6 months, a year, two years, four years, if you are going to survive.  While this post will focus on your business’ start-up needs, it will also give a few tips to help you make it past that four-year mark.

Eyes Wide Open

There are basically two sources of start-up monies: yourself or someone else.  It may not take much to convince yourself that you are a good risk, but this is your hard-earned cash that is on the line here.  You had better know just how much money and how much risk are involved.

A money lender has no less concern about the money.  They also need to know that you are a good risk and you are the only one who can convince them.   A well written business plan addresses these concerns.  See IMPress’ post, Writing An Effective Business Plan, for some guidance there, if you have not yet prepared one.

Your business plan details these sources of financial need:

  • Facility rental or purchase
  • Equipment rental or purchase
  • Web-site, hardware and software expenses
  • Raw materials purchase
  • Payroll and employment tax liabilities
  • Advertising, signage and marketing expenses
  • Sales expenses and tax liabilities
  • Insurance costs, both business and health
  • Licensing, professional dues and memberships

From this, you should be able to accurately figure how much money you must have just to open your door to the public.  But you can’t stop there.  Your business plan must also help you determine how much money you need to keep your doors open for those few months when your sales are likely to lag behind your expenses.  Whenever the amount of money going out exceeds the money coming in, this is”negative cash flow.“ This is discusses in more detail in the next section.  Suffice to say you must have enough money secured to cover this period of time.

So, your business plan lets you know those two things: just how much it will take to get going and keep going until your cash flow tips to the positive, on paper anyway.  Great!  You know just how much of your cash-on-hand, savings, investment income, home equity, unused credit card limits, stock sales, inheritance, insurance settlement, lottery winnings, IRA or 401(k) – what have you – you are putting on the line.  You also know just how much you stand to lose, if the worst happens.

If you determine that you have the means to launch out on your own, you are in a most enviable place.  You may not need to consider any outside sources of financing for several years or until you are successful and wanting to grow.  In this case you may want to seek out a venture capitalist, who specializes in involvement with just your type business. More on that later.

One last word before moving on:  If you are considering cashing in your IRA or 401(k) just be aware that your plan administrator is required to withhold 20% of the requested amount for taxes.  Plus you are liable for an additional 10% early withdrawal penalty in most cases.  Figure this into your strategy and talk it over with your plan administrator to make sure you have all the correct information.

Determining Your Financial Need

So, you must know both your business’ start-up cash need and your monthly cash flow needs.  Essentially, cash flow is the stream of money flowing through your business – what is coming in and what is going out.  More coming in than going out means there is a positive cash flow; more going out than coming in means there is a negative cash flow.

Obviously, a negative cash flow means that there is no cash available to pay whatever bills have come due.  Most businesses start out in a negative cash flow position since it normally takes time to get established and start producing adequate income.  That said, most businesses need some extra cash on hand for this initial launch period.  Just how much money is the question.

It may seem obvious, but cash flow is concerned with cash.   You can’t stay in operation without cash.  Profits are not the same as cash.  Your business plan may clearly show that your business is profitable, but profitability does not guarantee having cash when you need it.  Accounts receivables are not cash.  You may have thousands of dollars out there due to come in any time, but until this money comes in, you cannot pay bills.

Investments that mature next year do not help your cash flow now.  This will only become an addition to cash flow in the future.  That inheritance you are expecting does not help your cash flow.  Granted, these are good things to have because, if need be, you can likely borrow funds using them as collateral; however, keep in mind that you must have a sure way of meeting your business’ immediate cash needs.  Go to the Small Business Administration (SBA) website for some additional insights on cash flow.

Also consider this:  Your business may be the type that is a steady income producer, but yours may be a seasonal business – in the boom times there is plenty of cash flowing in, but in the bust times there is not enough cash flowing in to meet all expenses.  Knowing your cash flow needs and predicting when they are likely to be negative allows you to adequately plan how to spread your money over the entire year, so that the boom bails out the bust.

So, for your own benefit and certainly before approaching a lender, determine your cash flow position for at least the first few months, or longer if you have significant seasonal variations.  Figure all monthly expenses – rents, utilities, payroll, taxes, supplies, maintenance, insurance, advertising, dues, loan repayments – and compare these figures to how much you are reasonably sure will be coming in.

If your cash flow picture looks negative, you have to secure enough money to ensure that you can pay bills for 6 months, a year, whatever length of time you are reasonably sure it will take before your business has enough coming in on a regular basis.  If you know that you have significant seasonal or cyclical swings, you must be able to set aside enough money to even out every month over the course of the seasons.

For example, let’s say that you have determined that you need $58,000.00 in start-up money just to open your door.  You have also determined that your monthly rent, payroll, taxes, advertising, materials, loan repayments, etc. total $7,500.00.  You project that your sales could reasonably be expected to be around $6,500.00 per month for the first 6 months.  So you will have a negative cash flow of $1,000.00 ($6,500 – $7,500) each month for the first 6 months.  So you need to have $6,000.00 ($1,000 x 6 months) to cover your first 6 months in business.

So, your real financial need is the $58,000.00 (start-up) plus $6,000.00 (monthly) for a total of $64,000.00.   This is the amount you need to put up yourself or borrow.

What a Lender Wants

The long and short of it is that lenders want to get their money back, preferably with interest.  Different lenders have different criteria for deciding who they will back, but all make their decisions based on these questions: Who are you?  How good is your idea?  What’s in it for me?

The major tools in your arsenal are your personal reputation, your business idea, and your business plan.  Knowing what is important to each type of lender helps you figure out who to approach and how to approach them.

Friends and Relatives

You may be reluctant to approach your friends or relatives, and rightly so.  Friendships have been wrecked and holiday dinners ruined because of dealings over money.  On the up side, these are people who know you, have a good opinion of you and want to see you succeed.  Some of them may even be involved in the business as partners or employees.  They are willing to share the risk with you.

When friends and relatives do loan you money, it is usually for a low or no interest rate, which can be very beneficial.  Some may even want to just outright give you money, not expecting to be repaid.  Be sure you know going in who is expecting what.  You can draw up a simple contract to show what was loaned and how all parties agree to being repaid.  Show the interest rate, monthly payment amount, date to begin repayment, and length of time over which to spread the payments.

The important thing is to try to head off any misunderstandings from the start.  They may not want to look at your business plan, but you certainly want to be able to describe your business to them in some detail so they understand what they are getting into.  This also gives them some things to say when they are bragging about you and your new venture.

Banks and Lending Institutions

If you have been careful to cultivate a relationship with your banker as one of his customers, you may already have someone with a high opinion of you in a position to talk to you about a substantial loan.  Unfortunately, most bankers today cannot make decisions without consulting the home office – 500 miles and six degrees of separation away.  You have to have more to offer, hence the perfect place to insert your business plan.

The home office will not want to read all the details in it; they will most likely want the Executive Summary, land and equipment listing and a spreadsheet of initial and monthly expenses showing adequate cash flow.  They will also run a credit check on you, since this is their best indicator of how you manage money.  They may want you to submit a statement of your personal net worth.

Collateral is very important, too.  Most banks do not consider equipment, even very expensive equipment, as good collateral because, in the event of foreclosure, it would likely sell for only ten cents on the dollar.  Land and buildings are generally good collateral, since they can often be sold for at least as much as the loan amount.  Some banks will only loan you money if you deposit that amount in an account with them.  Of course, you may have to borrow money from your friends and relatives or cash in your IRA to raise this deposit!  You are probably thinking: “If I had that much money, I wouldn’t be asking them for it!” which is the lament of the borrower.

The SBA has set up loan programs to encourage banks to support small businesses.  In essence, the SBA’s loan guaranty program says that, even though you are borrowing money through the bank, they, rather than the bank, will back your loan, so that the SBA is out the money should you default.  Contact your banker or the SBA at for specific information.

Angel Investors

Angel investors are individuals or groups of investors who have a pool of ready cash and have gotten into the business of supporting start-up companies in order to make more cash.  While Venture Capitalists generally don’t want to talk to you unless you need a million or 2 and have a successful track record, an angel investor is willing to consider investing up to $250,000 or $500,000 in a start-up.

They don’t want to read through your business plan either, but they do want the Summary and what your financial need is.  Then they do their homework and decide if they like what they see.  Usually, they want to see a return on their investment within 3-5 years, and may want it to be 10 times their original investment!  It will most likely cost you a portion of your business’ equity.  This is a situation where you really want to consider the cost before you proceed.  Make sure when you negotiate with the angel that you know and understand everything that pertains to the terms of agreement and the long-term consequences for your business.

In addition to the money, angel investors often work with you in business planning, advising, networking and promoting your business.  Whatever helps your business helps them too.  Once you find an angel investor, it may take several months before they decide to invest in you, so you most likely will need to have secured another source of funding, unless you are prepared to wait that long before your launch.

Some places to look for angels are and  To find someone in your particular field, enter “angel investor” into your search engine and choose from among those that turn up.  Don’t overlook angel investors who may live in your own community, either.  You may not be aware that that retired business mogul is an angel until you contact him.  Ask around among other small business owners and investors to find out what and who they know – the heart of networking!

Venture Capitalists

Much of what was said about angels applies here as well, except that venture capitalists are looking mainly for growing businesses.  This means you need to have a solid track record and be clearly poised for growth if you only had more capital.  With venture capitalists, we’re talking millions, not thousands.  Their biggest question is:”How well does this business fit us?“

VCs tend to make particular types of investments, so you need to do some homework before you even approach them.  Find out what they have invested in before, and prefer to invest in.  The last thing you want is to approach someone about widget manufacturing when they are all about health care. This shows that you have not bothered to find out who you are talking to.  Then get yourself ready to show them how what you are doing promotes their goals.  Since most ventures that they back do not pay off, they will require a big return from those that do.  Again, carefully consider the cost to you and your business, since you are putting up its equity in order to secure funding.

Government Grants

The government offers over a thousand grant programs that supply funding to many types of businesses and endeavors.  Since these are grants, they are not paid back.  The process for getting a grant involves finding one that fits with your business type, writing a grant proposal, being awarded the grant, receiving and disbursing the funds, and giving an account of program outcomes.  This can be a difficult and lengthy process, but you may decide to at least research the possibilities.  Visit to read through the grant categories, register for grant information, check dates for submitting proposals, and download grant applications.

You may find many websites that advertise ”free grant money” but they are offering services that you yourself can accomplish – searching what grants are available, what has been awarded in the past and recently, and what areas are ”hot” for opportunities.  You may want to enlist some help when it actually comes to writing the grant.  Your well written business plan is an asset here, as nearly everything you have put into it will be required in the grant proposal.

In Summary

Since most small businesses fail due to inadequate financial planning, you can help ensure your success by knowing exactly what your start-up and operating needs are for your first several months of business.  Know your cash flow picture.  If you are not going to finance your start-up yourself, consider friends and family, banks and lending institutions, investors and capitalists, and government grants as possible sources of funding.  Be ready to communicate clearly and succinctly what your business has to offer and what money it will take to make it happen.

IMPress Action Checklist

Below is a list of the steps that will help you as you search out sources of capital for your business. Check off each step as you complete it to keep track of your progress.

  • Total your lump-sum start-up financial needs from your business plan
  • Project your monthly expenses for 6 to 12 months
  • Determine any monthly cash flow shortfall
  • Total your start-up costs and 6 to 12 months’ shortfall
  • Assess your own resources for meeting this financial need
  • Prepare business Executive Summary (from business plan) and statement of total financial need for potential investors
  • Prepare a Net Worth Financial Statement
  • Decide which potential investor(s) to approach
  • Call for appointments or contact via e-mail
  • Prepare to supply brief but thorough answers to investor’s questions
  • Research government grants, if applicable

Written by

In 1999, Lisa Rae created her first online small business eCommerce website. She successfully achieved a client base of over 15,000 active customers by implementing customer creation and retention projects. Her execution of online advertising campaigns, as well as print media campaigns that lead to annual revenue of over a million dollars annually. After six years of leadership, Lisa Rae sold the company and began offering marketing consultant and website services on short and long term contracts for businesses of various sizes. She meets her clients’ objectives through customized marketing plans using a wide range of marketing tools including WordPress website creation, Search Engine Optimization (SEO), Social Media Marketing, print collateral, email marketing, and more.

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