Start Up Money For Home Based Businesses – Lessons From Success

If you need money start a home based business, where do you look? A good place to start is to consider where successful companies found the money they needed.

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Coopers & Lybrand, one of the nation’s largest accounting firms, conducted a study a few years ago of 328 fast growing manufacturing and service companies. Interestingly, they found that most of them started without the help of outside capital. These highly successful companies, it turns out, were usually started with the founder’s own money and with help from family and friends.

Start-Up Funding Sources

Owner, Friends, Family 71%
Investors 13%
Bank Loans 8%
Supplier/Customer Alliances 8%

An Inc. magazine survey of the 500 fastest growing U.S. companies (of any kind) shows the same general breakdown:

Inc. 500 Sources of Seed Capital

Personal savings 78.5%
Bank loans 14.3%
Family 12.9%
Employees/partners 12.4%
Friends 9.0%
Venture Capital 6.3%
Mortgaged property 4.0%
Govt. guaranteed loans 0.1%
Other 3.4%
Grants 0%

The percentages don’t add up to 100%, by the way, because many companies start with money from several sources.

The Inc. survey also provides a breakdown of how much money was available to start:

Inc. 500 Start-up Funding

 

$1000 or less 13.0%
$1000-$5000 12.6%
$5000-$10,000 8.3%
$10,000-$25,000 13.3%
$25,000-$50,000 12.0%
$50,000-$100,000 15.6%
$100,000-$500,000 17.8%
$500,000-$1,000,000 2.8%
$1,000,000-$2,000,000 1.3%
$2,000,000-$5,000,000 1.3%
$5,000,000 and more 1.1%

To summarize, over a quarter of the Inc. 500 companies started with $5,000 or less, and more than half started with less than $50,000.

The point is, you really don’t need megabucks to start a company, not even a fast growing business. But it’s worth noting that the Coopers & Lybrand study also observed that growth companies that did receive money from outside investors typically started with three times more money and went on to produce 30% more revenue. Even more interesting was their finding that those companies that started with bank loans raised only slightly more capital than the norm to start out, but went on to produce 76% more revenue than the average growth company surveyed.

Now, does that mean that if you want to make more money you should go after a bank loan to start? Not really. These figures are probably more a reflection of cause than effect: better grounded firms are more likely to qualify for a bank loan at start-up, and thus are likely to make more money in the long run. Either way, it’s clear that outside funding…if you can obtain it…will help you grow faster.

Even though, as we’ve seen, most company founders used their own money for start-up, they probably would have preferred to use someone else’s. The problem is most start-ups are simply unable to attract lenders or investors. But, as companies grow and prove their ability to generate cash flow and operate successfully, their financing needs and options begin to change–typically within two to three years of start-up.

The Coopers & Lybrand study showed that, on average, by their 28th month in business two out of three surveyed companies were funded primarily by outside sources such as banks, venture capital, and alliances. Significantly, those companies that received funding from investors two to three years after start-up raised nearly five times more money than those receiving bank financing, and today they’re producing, on average, 30% higher revenues than their surveyed peers.

In short, the best way to be successful is to dig deep, use your own money to get started, prove the concept, and then go after money to grow.

For more help on small business loans, angels and other private investors, venture capital, government loans and grants, preparing a business plan or financing application, and other money management advice, check out our all new, fully revised eBook, Finding Money–Secrets of a Former Banker.

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