If you're considering going into business for yourself, then you're probably wondering how to get money to do so. When you're used to a boss handing you a paycheck then it can seem really daunting to try and manifest that much money each month, plus any business expenses.
Most self employed businesses are service based. That means your business expenses are really rather low. If you require an office, then that'll likely be your biggest bill. After that you've got your website (which is around $20/month these days), any software subscriptions, and any advertising you're paying for.
With your business expenses so low, the real issue of financing your business is how you're going to make enough money to live off of. So you're first step here is to have a solid understanding of how much you need to live off of. When looking to finance a new business you need to have enough money to live off of while the business grows, plus a month or two of living expenses extra as your parachute in case you decide you need to stop launching your business and get a job instead.
But where does this money come from? Everyone has their own stories about where other self employed business owners money magically materialized from, but I'm not interested in magic. So here are the four places where the money really comes from:
Savings (a.k.a. "bootstrapping")
The vast majority of self employed businesses are started, at least in part, by using personal savings. The amount of savings needed depends on how much you need to live off of and how long you anticipate it's going to take to build the business. If you have even the faintest glimmering of the idea of becoming self employed, I recommend you start saving now. Even if you have an additional funding source, it's a good idea to have some savings in addition as an added safety net. This is also a great strategy to use in conjunction with a phased transition from full-time employment to part-time employment, before finally becoming 100% self employed.
If you're in a two wage-earner household then there's the possibility of tightening your belts and living off of one income until the business becomes fruitful. This is often not easy to do, so having savings in addition is definitely a good idea. Alternatively, if you have a parent or relative who would help cover your living expenses while the business becomes self sustaining, that can also be a way to launch a business. While having a benefactor is an understandably attractive option, it's not plausible for many people. It's also not nearly as common as the glow around it may make it seem.
If you're looking into starting self employment and you're thinking "I'll just get some investors!" Then let me save you a lot of hassle and tell you that's probably not going to happen. When someone is looking to invest in a company they want a significant return on their investment. In other words, if they invest $10,000 then later they want their investment to have matured to be worth more like $30,000. If you're in business for yourself it's going to be really hard to produce that kind of return. In most self employed businesses you work for a certain amount of time, and get paid proportionally. This means there's usually a cap on how much you can earn. (Though passive income strategies can shift that, it doesn't usually grow significantly enough.) High returns are usually produced by software that can be sold to many people/offered as a service, or by products that can be reproduced in large quantity.
Additionally, investors then end up owning part of your company. If you're company is tied up with who you are (like how I'm Maggie Karshner, entrepreneurial coach) then it's going to be odd for someone to own part of your business. Perhaps a benefactor or loan would make more sense.
Business Loans and Credit Cards
Borrowing money before a business is profitable is really tricky. First off, many banks won't lend to a new business venture. But more importantly, it's really risky to owe money before you're even making any money. I would really avoid getting a loan if at all possible. And hold off on using a business credit card until you have a reasonably consistent revenue. Use a loan or credit card to grow a business to the next level when it's already paying you enough to live off of. (When you're ready to investigate business credit cards check out The Simple Dollar's guide to business credit cards.)
Choosing a Financing Method
Keep in mind that we each have stories about which of these methods are most plausible, and these stories are often wrapped up in our self limiting beliefs. These stories may or may not be true in the actual launching of your business. I used to believe that I couldn't start a business because I needed a rich husband to support me while I launched it. Well, I don't have a husband, much less a rich one, but I have launched a business. So whatever your financing story is, examine it and see if there's a way to finance your business that actually fits your circumstances.