This weekend I attended a panel discussion at Pinchot University alumni day, where a series of grads talked about how they’ve actually funded their businesses to-date. There were some common themes but it was a wide range of sources, that I’ll organize in circles of personal connection.
First and foremost is your own pocket. A common theme is being able to run the business without paying yourself, so most entrepreneurs had supportive spouses with secure jobs. For those who need to get paid and so need to start with funding, the funding starts at home, for example, one entrepreneur was able to launch after receiving a small inheritance. Two other sources that did not come up are home equity and retirement equity. Home equity loans were a common business funding source before the meltdown, I’m not sure how common those are now. More recently I’ve heard from one or two entrepreneurs who have tapped their retirement funds. If you take the money directly out, you’ll have to pay big penalties for early withdrawal. An alternative is to find a self-directed IRA fund and then invest in your own business.
At the next ring out is getting money from other people who want to support you. One entrepreneur got their startup funds in unsecured loans from friends and family, at 10% interest to reflect the risk of such loans as family saw it. Community Development Finance Institutions or CDFIs were cited by several entrepreneurs. These are very much like bank loans in cost and terms: all the loans discussed in group required collateral and for large loans borrowers had to make personal guarantees. The advantage of a CDFI loan is they’ll lend to businesses that banks wont – for example banks will usually require a stronger track record of profitability.
Financial support can come in ways that aren’t cash infusions: favorable terms on rent or long repayment periods on supply purchases were ways these early entrepreneurs found support. Specific loans for equipment or supplies can be less risky for lenders and so easier to obtain because repayment can be tied to a specific revenue stream, or collateralized by a specific item. For example, a couple businesses were able to get loans to purchase supplies in larger lot sizes to get a price break, and then repay that loan as the supplies were consumed, and then repeat again for the next order. Several cited equipment loans. The folks making these loans were community members met through networking or just through business operations who wanted to be supportive. One business’s supplier let them have 5 months to pay the invoice. These opportunities are built through personal relationships, and to some extent have an informal personal guarantee. A loan against a purchasing contract from a potential customer can be another way to fund supplies and give security to a would-be lender with a less personal relationship.
At least two of the businesses had been through local business accelerator programs, and one of the entrepreneurs pointed out the importance of making sure those programs also provide access to capital! Both program graduates did get some grant funding as a result of participation in different programs, and one got access to ongoing borrowing opportunities.
The best source of funding for a business is of course, revenue. However one entrepreneur cast this in an interesting light – they’re still focused on their original business idea and think it can become self-sustaining but that it’s a long road. So they started a different, but related, line of business that will be profitable more quickly and that can cover fixed costs that support both businesses. I thought that particularly for social entrepreneurs, bootstrapping with a more mainstream business while you work on your cutting-edge idea is a path worth pointing out.