College Student’s Guide to Financing a Business

This article is part of the College Startup series. However, the information within it can be used by any person who is looking to finance their business.

When I started researching this guide, I could not find a single resource that was written specifically to help young entrepreneurs get business funding. Most books and articles on this subject are written for middle-aged people who already have some experience – and money. Most college students have cool ideas, but little experience and virtually no money.

Well, if you are middle-aged and have a decent bank account, this guide is not for you. There are plenty of books out there for you. But if you are a college student, or recent graduate, itching to finance your own company or startup, then read on. This guide is for you.

By the way, I assume that you already have a market-disrupting product or idea that will change the world. We’ll just cover the details on how to finance your college startup.

Part One – Get Organized

Your first step is to get organized. If you want people to put their money where your mouth is, you need to show them that your idea and your company have potential. You can’t do this and inspire confidence if you are sloppy and unprepared. Your objective is to prove that your company is well thought out and that you are well organized. That inspires confidence and, ultimately, investments.

Step #1: Should you Write a Business Plan?

Yes, but not in the conventional way. Unfortunately, most business plans out there are completely useless. They are done by entrepreneurs who buy a book/template online and just fill in the blanks. Most are done over the course of a couple of days and their objective is to impress investors. While the documents may look nice and be well done, they are usually a complete waste of time.

Keep in mind that I believe you should create a business plans – but not in the conventional way. Read this article to learn about my thoughts on college start-ups and business plans.

Step #2: The Presentation

Business plans don’t need to look nice; they just need to be well written. Investor pitches, on the other hand, need to look great and be compelling. Many student entrepreneurs make the mistake of just using the standard template that comes with most business plans. This big mistake could cost you dearly.

I suggest you read creating a winning investment pitch to get some tips on what makes a presentation successful.

Step #3: Choose a Corporate Structure

Because financing a sole proprietor (individual) can have legal challenges, most finance companies, angel investors, and venture capitalists only provide funding once you have incorporated. If your company does not have a corporate structure in place, now would be a good time to start thinking about this. I suggest you read our article on choosing a corporate structure.

Step #4: Get an Accounting System

Getting an accounting system is probably just as boring as having to chose a corporate entity. However, having a bookkeeping and accounting system in place is crucial for the success of your company. If your company is taking in money from others, either as investments, loans, or sales – you should have an accounting system in place to help you track everything.

I suggest you read does your college startup need an accounting system?

Part Two – Getting Funded

Now that you have taken care of the details and are ready to present your business, it’s time to talk money. Starting a business requires cash. It’s that simple. You need money to buy supplies, equipment, and everything else that you need to operate your company successfully and develop your products/solutions. And if you, like many college students, are starting a technology company, you will also need money to buy pizza and soda.

This part of the guide teaches you how to get funding to develop your company. Unfortunately, you will probably need to pay for your own pizza and soda.

Before we go into the details, let me tell you something about this guide. It’s intended to be realistic. We all hear stories of smart college kids, such as Mark Zuckerberg (Facebook), Sergey Brin (Google), and David Karp (Tumblr), who got funded by venture capitalists and grew rich. The reality is that most college start-ups do not get funded by venture capitalists early on. But this guide can help you fund your company so that you can get it to the stage where it can attract angel investors and venture capitalists.

Source #1: Your Savings

If you have money of your own, and if you can afford it, you should consider putting it into your business. This commitment shows other investors that you have skin in the game. However, this can pose a problem for cash-strapped college students who have to choose between investing in their business and paying their tuition.

This is a choice that only you can make since it’s your life. But let me give you one depressing and sobering fact: most businesses fail. If you have limited cash, the smart and safe choice is to use it for tuition. Yes, I know that the magazines carry stories of college drop-outs who became millionaires. Unfortunately, they don’t carry the stories of all the students who dropped out, started a business and failed, and don’t have money to go back to school.

If being an entrepreneur has taught me anything, it is that you should always have a Plan B.

Source #2: Mom, Dad, and Friends

It’s very likely that the first investors in your business will be family members and friends. If you want them to invest, you should treat them professionally and with respect. Adopt the persona of an entrepreneur and treat them as investors. This means that you should show them your presentation and business plan, and you should answer any questions they have.

There are two ways for them to give you funding. They can give you a loan, which can be repaid at a later time, or they can buy a portion of your business (known as equity). When you sell them equity, there is no loan to be repaid, but they get a portion of your revenues. Both methods have pros and cons.

A loan has the benefit that it does not give any ownership to your parents/friends. However, you must pay a loan back. An equity investment, in which you sell someone a portion of your business, gives them an ownership stake. This arrangement often means that they also get a say on how to run things. This brings me to the next point.

Regardless of what structure you use (loan vs. equity), you can be certain that your parents and “investors” may want to be involved in your business. Even so-called “silent partners” can become very vocal when their cash is on the line. This situation can create problems and you run the risk of alienating friends and family.

Caveats and suggestions:

  • Treat this arrangement professionally. Get proper loan documents or investment documents.
  • Make sure your family members understand the risk – including the potential loss of their money.
  • Remember that keeping family and friends is more important than starting a business (just my two cents).

Source #3: Credit Cards

Many college students choose to finance their companies using credit cards. This strategy is very risky because you are betting your personal credit that the business will succeed. Remember that most blemishes, or outright disasters, can stay in your credit report for a very long time. If you elect to use your credit card, use it only for short-term situations in which you will be able to pay the credit card debt quickly. For example, if you make widgets, have a solid client order for widgets, but need money to pay for some widget parts – use a credit card. But repay it as soon as the order is fulfilled and your client has paid you.

Let me stress this point again: using credit cards is a risky way to finance your business, as it could have long-term negative implications if things go wrong.

Source #4: Business Plan Competitions

One great way for college students to get financing for their startups is to enter a business plan competition or contest. Most universities have them. This gives you the chance to pitch your business plan to a team of judges, often including community business leaders, who provide useful feedback and critiques. The experience is valuable – even if you don’t win. However, if you do win, your company will get money to start, operate, and grow.

Many of these competitions have very specific rules. Be sure to read and comply with all of them. Remember, this may be one of the most important presentations of your life.

Caveats and suggestions: No caveats, as competitions are a great way to fund a business and make new contacts.

Resources:

Source #5: Crowdfunding

Crowdfunding sites such as Kickstarter and Fundable have become a very popular way to finance a business or project. In principle, these platforms allow you to pitch your business directly to crowds of people, who can choose to make an investment. Depending on the service you use, you provide a product, service, equity, or name credit to the investors in return for their money. These platforms have many rules of operation to make the transaction as smooth as possible.

Most of the companies that use these services have something that is unique and appealing to the crowds. If your company does not have a cool, tangible product (i.e., a gizmo), getting funded may be difficult. Furthermore, this type of funding is, in my opinion, fraught with risk.

For now, I am going to recommend against using these platforms. While popular, these platforms don’t have a proven track record. What is worse, you could also open yourself to the potential for liability from your crowdfunding investors. For example, it’s unclear whether you can legally raise funds for a startup from unaccredited investors. You could also be liable if things go badly – or if things go really well and they want a bigger return. My fear is that this crowd could easily turn into a mob of investors holding pitchforks and asking for your business.

Caveat: If you decide to use crowdfunding, be sure to have an attorney or expert explain all the details and implications to you.

Source #6: SBA Microloan

The Small Business Administration (SBA), an agency that helps small business owners, has a program focused on helping very small businesses and startups. This program is often underutilized, but it’s a great way to finance a company. Actually, the SBA Microloan is the only type of loan that I recommend to college students who want to start a company. This program is ideal for small business owners who need up to $50,000 to start or operate their companies. It’s not provided directly by the SBA, but rather through intermediaries.

Each SBA intermediary has its own requirements, but to qualify you need to take some basic business classes from them. Some programs also require that you work with an SBA counselor – an attractive resource since their counselors have business experience. Such programs can be ideal for college students or recent graduates who are looking to start their first company.

Source #7: Accion

Accion is one of the largest microfinance and small business lending networks in the US and has offices in every state. In a sense, they are similar to an SBA Microloan. To qualify for general financing, you need to have been in business for six months and you must have sufficient cash flow to repay the debt, among other requirements.

Accion also offers startup loans of up to $10,000.

Source #8: Business Loans

I’ll mention business loans only because I want this guide to be thorough. Most likely you will not qualify for one. This may sound harsh, but it’s reality. Most banks and lending institutions will not lend money to people who want to start businesses, unless they have plenty of other assets that can be used as collateral. In other words, despite what you may have heard, banks will not lend you money just on the strength of your business plan or your idea. They only lend money based on the strength of your assets that can be used for repayment. That’s why banks have the reputation of only giving loans to people who don’t need them.

To qualify for a loan, you will often need to have strong financial statements, positive cash flow, and hefty assets. I am yet to meet a college student who has all of these. Some bank loans are guaranteed by the SBA, which makes them easier to get. However, these have very specific eligibility requirements.

Source #9: Angel Financing

An angel investor is a person or group of people who specialize in investing in small businesses, usually startups. Investment criteria vary, but they usually invest up to a few hundred thousand dollars, which handles the seed funding stage of the venture. In exchange for their investment, they get equity in your company and usually a seat on the board of directors, giving them a say in how the company is run.

Most angel investors only work with a handful of investments. Because of that, they often specialize in certain industries. You should find one who specializes in the type of business you want to launch.

Some angel investors operate a individuals. Others, like CommonAngels, operate as organizations. The right angel investor – one with funds and helpful contacts – can be extremely useful and help you grow your company. The wrong one can drag performance and create problems. So choose carefully.

Angel investors are most concerned with two things: their return on investment and the exit strategy. The return on investment is the money that they will make from investing in your business. The exit strategy is how they will get paid. Exit strategies include selling the company to a larger company, going public, or just growing very quickly.

One last point, don’t assume that because angel investments are small you won’t have to be professional. Quite the contrary. Most of these investors have experience starting and running large public companies, so you have to bring your A-Game.

Some resources:

Source #10: Venture Capital

Venture capital (VC) can be similar to angel financing with the exception that venture capitalists often make larger investments than angels and are often (but not always) involved in companies at a later stage. Most venture capital companies have well-organized funds and have very a specific set of criteria – and industries that they invest in.

Like angel investors, venture capitalists bring more than money to the table. They have experience and contacts, which can be very valuable. Selecting a venture capitalist is a critical decision and affects your chances of success. Much like angel investors, venture capitalists are interested in their return on investment and the exit strategy.

One word of advice, you should not contact a VC firm unless your concept is well thought out. Ideally, you want to have a small operating trial of your product or solution working so that you can use real-world data. You also need to have a polished presentation and all the data (and business plan) to back it up. You should resist the urge to over-sell your idea since VCs are very familiar with the fact that nine out of ten investments fail.

Venture capitalists are concentrated among certain hubs, such as Silicon Valley, Boston (inside the 128 loop), New York, Raleigh, and other areas. However, most cities have smaller venture capitalist funds that invest in local companies.

Some resources:

Source #11: Your Hidden Resource – Your Professors?

One of your greatest and most underutilized resources is very close to you, probably within a short walking or driving distance: your college professors. While I doubt that teachers can invest in your business due to possible ethical concerns, they can help you with business plan critiques, contacts, experience, and advice. Often, the right advice and contacts can be worth more than money in the start-up phase of your company.

Contrary to popular (and cultural) beliefs, many professors are active in their industries. They often have very specific experiences and many have gone through the problems that you are trying to solve. All of this is at your disposal if you ask nicely and professionally.

One extra resource you should consider is your college library. The library can be very useful if you are looking for hard facts and figures. It can be a great resource if you are researching a business plan since librarians have mastered the art of finding facts.

If I were starting a business in college, my first stop would be professors within my faculty and my local library. If that did not work, I’d visit the business department. Lastly, many colleges have business plan competitions and entrepreneur clubs that can be very helpful resources.

Who is Marco Terry? About the College Startup Series

Marco TerryEver since I can remember, I’ve wanted to be an entrepreneur. I started my current company about 10 years ago and have had a great time running it. It’s the fulfillment of a dream.

Over the years, I have noticed two things. First, there are very few resources to help college students start their own businesses (though this is improving). Second, the little advice there is usually focuses on conventional wisdom, which often has shortcomings or is plain wrong. So I did something about it: I wrote this series.

I am always looking to improve this information, so I welcome comments. You can connect with me through Linkedin – Marco Terry -, through Google+, and through my twitter handle @marco_terry.

Now, go out there and build a great company.

Disclaimer: This guide does not provide legal or financial advice. It only provides information – which could be wrong. If you need legal or financial advice, get a good advisor.

Copyright: This guide is copyrighted. Please do not steal it. Actually, it’s updated regularly so you are better off simply linking to it.

Version: 1.4