7 Ways To Finance A Startup And How To Record It Your Books

Today I found this article on CNNMoney about ways to finance a startup. Though the ways of financing is familiar, I would guess that many entrepreneurs don’t know how to record this accurately in the books. It could be classified as an aset, investment, owner’s equity or loan.

Here are the seven ways, and I will explain how to classify in your business’ Chart of Accounts.

1. Bootstrapping. That is simply using your own money to finance the business. You can account for this by classifying this as an equity account and calling it Owner’s Investment. However, if you “loan” the business funds periodically by paying for expenses that you want to be reimburse for, then you should also add a liability account called “What The Business Owes Me“.

2. Friends and Family. This could be a loan or investment depending on the agreement you set with your people. It is good policy to have this designated in writing with the terms for repayment or if the person have an equity stake in your business. If this indeed is a loan, the accounting for this to set up a liability account called Friend/Family Loan. If it an investment, then set up an equity account for this and called Friend/Family Investment. Then you also would want to set up a corresponding Friend/Family Draw account to note payment of profits back to them.

3. Banks. Classify as a loan. Depending on the terms it is either a current or long term liability. If it is actually a credit card as oppose to a line of credit, then set it up as such.

4. Grants. If you are diligent and lucky enough to receive a grant, then it is a boon to your business. Classify it as an asset and tell your friends. Grant awards are great publicity!

5. Angels and 6. Venture capital. The accounting is similar for both (an equity account for the investment.) However, the difference is whether Angel Investor or Venture Capitalist is a partner or member of your business and how is profit/capital gains paid to them.

7. Customers and suppliers. This can be a bit tricky. Are you customers/client merely referring new business to you or are they official partners in your business? If it just a referral, then an agreement should be drawn to specify the percentage of the referred sale your customer/supplier brings to the business. Classify the sale as referral/commission income and the payout as a commission expense. If you customer/supplier is more like a business partner, then you have to determine what their role is and what is their member or partner draw. That has to be clearly described in contract terms.

Getting Mini-Loans Online

There is an alternative to applying for loans from a bank. If you only need a little funding or you are not fully set-up as business yet, then you may want to check out these sites where people (friends and strangers alike) can loan small amounts to you.

Lendingclub.com has a Facebook application where borrowers are linked with lenders who share similar interests.

At Prosper.com loans can be up to 25,000 so they are oftern for start-up businesses.

Virgin Money “facilitates loans between people who already trust each other.

Zopa is a UK-based personal listing/lending service which will be coming to the US soon.