As an example, my second company, a design and development agency, never took any outside funding of any kind. In fact, it was profitable on day one–I charged a decent hourly rate for my services, some of which went to my salary and some of which stayed in the business. Over time, I used our profits to hire more people and turn it into a nice little business.
This worked for usÂ because the goal was never to become a huge company. We had competitors, of course, but often, we were the only serious bidders on a project. We weren’t in a race to create a defensible intellectual property that would dramatically alter the dynamics of a market or create a new one entirely, which you’re often doing in a startup.
Here’s a handy gut-check for the “startup or small businessâ€ question: Imagine your company 10 years in the future, having grown entirely on its own profits. Is your company irrelevant? If so, it’s probably a startup. If not, it’s likely a small business.
Small businesses often do need capital to get their footing. You may need to hire some help before you have the profits necessary to do so, or make payroll before you’ve been paid on a project. You may have to purchase inventory, equipment, or commit to retail space for some period of time. So how might you do that? Here are some common ways:
- Your own job.Â Just like in a startup, it’s very common for founders to put in their own capital to get a small business going. This could come from savings so you can go full-time right away, but it could also be aÂ surplus salary that you can use while you moonlight working on your business. If you have a steady nine-to-five job, you may not only have a little extra cash, but a few hours each day to dedicate to a project on the side. That flexibility can be invaluable in the early days.
- Friends and family.Â Also like in a startup, founders may be able to raise some money from friends and family who are willing to risk some of their assets. And while the friends and family method is fairly common, I’ve developed a strong personal bias against this type of financing. Business, as they say, is business–and things go wrong. I had a close family member provide some debt financing to my first business, and that hung over my head every day we hadn’t paid it back. While I am extremely grateful for the help we received, and while we were able to fully pay it back, it can be highly emotionally draining to worry about something outside your control happening and failing to meet your obligations to a close friend or family member.
Tim Chaves is the founder and CEO at ZipBooks, a free accounting tool with built-in invoice financing, time tracking, and payment processing.
BusinessCollective, launched in partnership with Citi, is a virtual mentorship program powered by North America’s most ambitious young thought leaders, entrepreneurs, executives and small business owners.