A guide to smart startup funding

This article is the third in a monthly column from the SBA Utah District Office on how to start a small business. The material in this article is provided for informational purposes only and as a starting reference. Readers are encouraged to consult with an attorney and accountant regarding the formation and use of an entity for their particular business.

Starting a business is a thrilling journey, but it requires careful financial planning and creativity, especially in the early stages. For most entrepreneurs, accessing capital can feel daunting. This article explores the essentials of bootstrapping your business, understanding capital needs and utilizing resources and programs — such as SBA support — to set your startup on a strong foundation.

Starting small while proving your concept

Every great business begins as an idea, but transforming that idea into a thriving enterprise requires proof of concept. Starting small allows you to test your business in the real world, gathering valuable feedback and making necessary adjustments before scaling. By starting operations, even at a minimal level, you gain insights into your market, operations and customer preferences that cannot be fully understood through planning alone.

During this phase, it is critical to keep expenses low while ensuring you have access to enough capital to meet basic needs. Bootstrapping becomes a vital strategy here. By creatively managing resources, you can validate your business idea with minimal risk and lay the groundwork for sustainable growth. Even generating revenue for six months can be a huge advantage when seeking external capital options later.

Bootstrapping tips to lower costs

Bootstrapping is the art of stretching every dollar to its maximum potential. Here are some strategies to consider:

• Buy used equipment. Save money by purchasing pre-owned equipment instead of new. Websites, auctions and local marketplaces can be great sources for affordable, reliable equipment.
• Coordinate purchases. Partner with other businesses to buy supplies in bulk and share costs. For example, joining a local business network can open opportunities for shared purchasing agreements.
• Use shared office space. Many buildings that house Small Business Development Centers (SBDCs) in Utah are business hubs that also offer coworking spaces at affordable rates, often lower than private coworking locations. While not every SBDC location provides this, many do. These spaces often include utilities, meeting rooms and internet access, reducing operational expenses.
• Lease instead of buy. Leasing equipment allows you to access necessary tools without a large upfront investment, freeing up cash flow for other critical expenses. Even in a situation where there is the possibility for a higher profit margin if you own the equipment, it may not be bad to consider leasing equipment in the beginning.
• Obtain customer payments in advance. Improve cash flow by securing deposits or prepayments from clients. This strategy also helps demonstrate customer commitment to your business and proof of concept.
• Make do with what you have. Use existing resources and personal tools to minimize expenditures until revenue grows.
• Vendor financing. Check if your suppliers offer payment terms that align with your cash flow, such as deferred payments or installment plans.

These tactics help conserve cash, enabling you to focus on proving your concept and preparing for the next phase.

Sources of startup capital

Every business requires capital to get off the ground, but the amount and type of funding depend on the business model. For some, it might involve buying inventory or equipment; for others, years of research and development may precede revenue generation. Whatever the case, having a clear understanding of your capital needs is essential.

Research from the Ewing Marion Kauffman Foundation shows that more than 50 percent of entrepreneurs fund their startups using personal savings alone. This is followed by credit cards, then loans or investments from friends and family. Some startups also seek business loans or investment funding, but not as many as you may think. While all these sources are common, each comes with its own set of challenges:

• Personal savings: Relying solely on your funds can limit personal financial flexibility and make securing future loans more difficult.
• Credit cards: Although convenient, credit cards carry high interest rates and should be used cautiously.
• Friends and family: Borrowing from loved ones can strain relationships if not managed carefully. It is crucial to create written agreements upfront that detail terms and repayment expectations.
• Business loans: Business loans often get the most attention but fund relatively few startups due to the way lenders assess risk. SBA programs help mitigate this risk by providing guarantees to lenders, making loans more accessible for startups. These will be explored in more detail later in the article.
• Investment funds: Investment money is often considered one of the most expensive ways to grow because you aren’t just paying back a loan with interest — you are giving away part of your company. What may seem small today could become a significant cost in the future. If seeking investment funds, it is often advised to look for individuals who bring experience and expertise in your industry, not just capital.

Leveraging resource partners

Entrepreneurs don’t have to navigate these decisions alone. Resource partners like the Small Business Development Centers (SBDCs), Women’s Business Centers (WBCs) and SCORE mentors provide invaluable guidance. They can help evaluate funding options, create business plans and prepare financial projections, ensuring you’re ready to pursue the right funding sources.

Preparing for a loan

Even with bootstrapping, most businesses will eventually need external funding to grow. This is where preparation becomes critical. Securing a loan requires preparation and planning. Understanding your funding needs and having the necessary documentation in place can make or break your chances of securing a loan.

Here are the essential elements to focus on:

• Business plans: Develop a clear and detailed plan outlining your vision, market and financial projections. A robust business plan builds credibility and demonstrates your preparedness.
• Use of funds: Clearly articulate how the loan will be used. Lenders expect detailed explanations rather than rough estimates.
• Market research: Conduct thorough market research to understand your target audience and competitive landscape. This research will also support realistic financial projections.
• Financial projections: Provide forecasts that demonstrate your business’s potential. Use industry financial comparisons and benchmarks to validate your projections, as lenders will analyze these metrics to assess feasibility. Resource partners like the SBDC can help provide insight into financial benchmarks for your industry.

Types of startup loans and SBA programs

Entrepreneurs have a range of funding options, including but not limited to:

• SBA microloan program: Designed for startups and small businesses, this program offers loans of up to $50,000 through nonprofit lenders like the Utah Microloan Fund and MoFi. Microloans are ideal for businesses needing smaller amounts of capital and include technical assistance to improve long-term success.
• SBA 7(a) and express loans: Contrary to popular belief, startups can qualify for these loans, as the rules allow financials to be based on projections rather than only historical data. However, having historical financial numbers lowers the risk for a lender and makes the process easier. These loans are provided by traditional lenders who participate in the SBA program, making it important to ask upfront if your lender offers SBA-backed loans and if they work with start-up companies.
• Local and alternative loan programs: Many counties and regions offer unique loan opportunities tailored to local businesses. Resource partners are thoroughly connected to their specific economic ecosystem and can provide details on local programs and help you evaluate them.

Finding a lender

It’s important to note that SBA loans are facilitated through participating lenders, not the SBA itself. The lenders provide the capital with the support, backing and/or guarantee of the SBA. Entrepreneurs in Utah can find a list of participating lenders by viewing the Utah SBA Lender List.

Before meeting with a lender, be sure to:

• Understand the loan requirements. Research the specific documentation and qualifications required by the lender. This may include business plans, financial projections and personal credit history.
• Ask about SBA programs. Confirm whether the lender offers SBA-backed loans for startups, such as 7(a) and microloans, and inquire about their application processes.
• Work with resource partners. Collaborate with SBDCs, WBCs and SCORE mentors to ensure your loan application is complete and compelling. Their insights can significantly enhance your preparedness and increase your chances of approval.

Small business resource partners: Your key to success

Resource partners play a pivotal role in helping startups navigate the complexities of entrepreneurship. Here are three essential partners to connect with:

Small Business Development Centers (SBDCs) provide free business consulting, market research and assistance with loan applications. Many of their affiliated buildings serve as vibrant business hubs that offer coworking spaces and networking opportunities.

Women’s Business Centers (WBCs) focus on empowering women entrepreneurs through education, mentoring and access to capital. They offer many training sessions that can help, including individual training sessions/topics and cohort-based trainings. These cohort-based programs not only provide support and assistance spread out over time but also allow participants to mastermind and network with other women-owned businesses.

SCORE mentors offer free one-on-one mentoring from experienced business professionals. SCORE’s national network also provides workshops and online tools to enhance your business acumen. The SCORE website also includes rich templates for business plans and financial projections.

These organizations are experts in small business financing and are deeply connected to local and national funding opportunities. They can guide you through SBA programs, USDA programs, traditional loans and alternative funding options, ensuring you’re equipped to make informed decisions.

Conclusion

Bootstrapping your business and securing the right funding are critical steps in building a successful startup. By starting small, validating your concept and leveraging creative cost-saving strategies, you can position your business for long-term success. Accessing capital doesn’t have to be overwhelming — resource partners like SBDCs, WBCs and SCORE are here to help. Combine their expertise with SBA programs to unlock the funding and support you need to turn your entrepreneurial vision into reality.

Whether you’re bootstrapping or preparing for your first loan, remember that every dollar counts, and every decision shapes your journey. Start small, think big, and let the resources available guide you to success.