Starting something doesn’t mean you have to go into debt or get a high-interest credit card and spend like crazy with no way of paying anything back. Begin by keeping your overhead as low as you can. You might have a picture in your mind of what a “real” startup looks like—a cool loft space in a brick building with big windows and an organic coffee roaster downstairs—and you might think you need that to make your venture seem legitimate. But before you shell out thousands of dollars in rent for a space you don’t really need—yet—figure out how you can do what you do without spending too much money. Once you outgrow your home office or your garage or your kitchen table and your revenues are flowing in, you can find a great office. For now, see how low you can keep your overhead.

STARTUP CASH

This is where it all gets real: How do you find money to buy materials or equipment? How do you decide how much to spend? Where can you turn for that much-needed cash?

The answers are varied and depend on individual circumstances. We’ll give general information here that you can tailor to your business needs, starting with how to figure out how much money you need in the first place. Try to be as minimalist as possible. If you don’t need to travel to San Francisco in person to buy glass beads and can get them shipped for a few dollars, save that trip until you have many, many reasons to fly yourself there in person. If you can make a prototype of your solar radio with the funds you have on hand, think long and hard before shelling out more money to make three prototypes. Will having two more really give someone a better idea of how the radio works?

HOW MUCH MONEY DO YOU REALLY NEED per week to get your business started and to keep it running? Do as much as you can yourself: design your own web page, make your own business cards, design your own logo. That way you won’t have to pay other people just yet. Labor is often one of the largest expenses business have, whether they’re providing a service or a good, so you’ll probably want to delay hiring any employees until it’s absolutely necessary—wait until you have too many customers or too many orders coming in to handle them all yourself.

NOW USE YOUR ESTIMATES of how much money it takes to start and run your business and compare those with how much you think you can reasonably earn from your business. Ideally the amount you think you can earn will be greater (if not right away, then down the line) than the amount it costs to run the business. It’s pretty common to be spending more money than you make at the beginning—so don’t feel discouraged, as long as you can envision a time in the future when you’ll be turning a profit.

START BY USING THE TEMPLATE we provide for earnings and expenses in the appendix. In the expenses column, list all the amounts you anticipate having to spend. In the earnings column, list the income you expect to earn, item by item. Eventually this sheet will shift from being estimates of expenses and earnings to records of the real thing, but it always helps to have an estimate in the beginning so you can see whether things are going according to plan or not.

BORROWING

One very effective way to get startup money is to borrow it, and there are many people and organizations willing to lend it on varying sets of terms. Banks charge interest. Some organizations ask for a share of future profits. Some people may give you a start out of the goodness of their hearts and only ask that you make them proud in return. What makes one source better than another?

LET’S START WITH YOUR PARENTS. It’s easy to want to turn to them, and parents are often a great source of encouragement and funds. But just because you live with them doesn’t mean you should treat your parents differently from any other lender. You should still work up some sort of agreement stating how much you’re borrowing and the terms according to which you’ll repay the loan. Be realistic. If you think it will take a year to repay what you borrowed, don’t promise to get it back to your parents in a month. That will just make you feel like you couldn’t deliver and it will make your parents feel like you weren’t honest.

SET UP A REPAYMENT SCHEDULE THAT MAKES SENSE. Maybe you need $1,000 up front to rent an industrial kitchen, but you’re catering three big parties in the next couple of weeks and you already know how much you expect to be paid. You can pay back the $1,000 in installments until you’ve paid back the entire amount. If you are paying interest, or a little bit extra for each dollar you borrow over time, factor that in as well.

DOES BORROWING FROM YOUR PARENTS MAKE YOU ANY LESS BOSS? Not at all. Does forgetting to repay the loan? Absolutely. So be a good borrower and repay the loan. Even if you’ve borrowed from your parents, you should still be responsible and adhere to whatever terms you set out—and communicate with them if there’s a change in the situation.

THE SAME GOES FOR BORROWING FROM FRIENDS. If you do this, be very clear in your terms. Set out exactly how much you plan to borrow and when you will pay it back. The old warning about borrowing from family and friends is mainly based around the (hopefully unlikely) situation in which you borrow money and you can’t repay it. Things can get tense. But if you follow through on your promises of when you’ll repay the money and how much interest you’ll pay, your lenders may be happy to loan you more money in the future if you need it. You’ll be what’s called “a good risk.”

PROFITS!

You’re selling something and earning some money for the first time. It’s a great feeling and you should give yourself a high five for getting to this point. And after that all-too-brief moment of glory, it’s time to get down to the big issue: what to do with that money.

We’re talking about how your profits can continue to fuel your business. In essence, if your business is making more money than it’s spending, you can be your own lender. You can use your profits to invest in equipment, supplies, marketing, salaries—whatever your business needs to do more and make more. In other words, you can grow bigger, reach more people, and hopefully be more profitable with that larger scale.

We’re not saying you can’t take any of your profits and use them to buy something fun. But you’re the one who gets paid last. First you repay loans from other people, whether they’re banks, parents, or organizations who fund startups. Then you invest in the future growth of your business, buying whatever supplies you need to keep going and growing. Then you pay yourself. If you do things in this order, you will keep your lenders happy, you’ll keep your business running, and most likely, you’ll have profits—money—for yourself.

BIG-TIME BORROWING

LET’S START WITH BANKS. While they can be a great source of small-business loans, dealing with them can also be complicated. You generally need a business plan and some collateral, or something of value, to guarantee your loan. When you buy a car, the bank agrees to give you a loan, and you can drive the car as long as you’re diligent about making your monthly payments on time. If you stop paying, or default on your loan, the bank will take the car. Same goes with business loans. You need some proof that you’ll be able to repay the loan. If your business owns equipment, that may be used as collateral. Or you may have to have someone else—a parent, possibly—cosign on the loan and vouch for your ability to repay it. In other words, they’ll be on the hook if you don’t pay. So be responsible.

BORROW MONEY FROM OTHER LENDERS. The US Small Business Administration (sba.gov) and CanadaBusiness.ca both have a wealth of information on applying for loans from microlenders, investment funds, or community organizations. These types of loans are generally best when you need substantial funds to buy equipment or ramp up production. When you are just starting out, it might be best to try to get what you need from more personal sources. For short-term loans, BusinessUSA (business.usa.gov) is a great starting point.

THE RULES OF BORROWING COUNT whether you’re borrowing a few bucks from a friend or a few thousand from a bank: you need to pay the money back when you promised to do it, with interest if those are the terms. Don’t borrow more than you think you can pay back. You’ll be so much more likely to get offered a new source of growth funds when you need it if you pay back your lenders like a pro.

CROWDFUNDING

Just like you can crowdsource a name for your business by putting out a query on your social network, you can crowdsource startup cash as well. There are many established crowdfunding sites, and new ones are cropping up all the time. Some may take a percentage of the money you raise, and others may let you keep everything.

TAKE KICKSTARTER, for example. You set up a fund-raising end goal, say $15,000, to publish a first print run of a book you’ve written. You’ll come up with small and large increments of money people can contribute to your project, along with little rewards you’ll offer for each amount. Maybe you’re willing to send a thank-you letter on fancy stationery to anyone who donates $25. Then for a $35 contribution, you can offer the thank-you letter plus a bumper sticker. Maybe a $60 donation also gets you an e-book, and $100 gets you a signed hard copy. Offering little incentives is a good way to get people to make the jump to the next level of donor. Once you have everything set up, send out notifications via e-mail or social media to all your contacts letting them know about your campaign. Supporters have the option of donating with or without the incentives you’ve offered. On Kickstarter, if you don’t reach your $15,000 goal, donors have the security of knowing their donations won’t go toward a partially funded project. Only once you meet your goal of getting $15,000 in commitments from donors do you get all the funds.

PROS AND CONS OF BORROWING
MONEY SOURCE RISK REWARD PRESSURES

You: money you’ve saved

It can take a while to save the startup cash you need.

You’ll have the satisfaction of being in control.

It’s your money at stake and you’d better spend wisely.

Investors, parents, bank, credit card

You’ll be indebted to others. They may be critical of how you spend their money.

You’ll be able to raise more money more quickly by relying on others.

You’ll need to repay the money according to a schedule, often with interest. That means you’ll have to generate enough funds to pay back your creditors.

OTHER SITES LIKE INDIEGOGO, CROWDRISE, AND GOFUNDME have their own versions of crowdfunding. Many of these other sites do allow projects to be partially funded, which might work better for you. And there are many others—shop around just like you’d shop for anything else and choose the one that best suits your project.

DON’T FORGET THAT YOU CAN COMBINE DIFFERENT SOURCES OF FUNDING. If you run a successful crowdfunding campaign, that’s something you should tell a potential investor to prove that a lot of people are already on board with your idea and that you already have some seed money. People find safety in numbers, and if people are investing already, that’s a good sign.

PAYING IT FORWARD

Always remember all the people who helped you get off the ground, the ones who listened to your worries about whether you’d succeed, the ones who gave you great advice. Someday the time will come to pay it forward and do something for someone else. You could commit to mentoring someone less experienced, bringing her along as an intern, or answering her questions when she’s just starting out. No matter how challenging being a Boss can be, you have valuable skills and information that can help someone else.

YOUR CONTRIBUTION CAN ALSO BE FINANCIAL. Kiva.org is a website that allows anyone to make small loans to borrowers around the world. You could offer up the sewing machine you bought but are only using one day a week to someone you know who wants to start her own business. You could have a company policy of giving a percentage of profits to a charity. Let people know you’re doing it and make it part of your sales campaign so your customers will know they’re giving back too, just by doing business with you.

KA-CHING—GET PAID

There are many services designed to make it easier for people to pay you. First and easiest is getting paid in cash. Cash is universal, and you can trust its value. But not everyone carries around much cash these days, so for expensive purchases, cash might not make sense.

Let’s talk about an even more important aspect of cash: it’s difficult to keep track of. Once you spend it, there’s no record you ever had it. Unless you’re really diligent about asking for receipts and keeping them filed away and labeled, you can go through a ton of money without any record of where it went.

Aside from cash, credit cards, debit cards, PayPal accounts, checks, and money orders provide an almost limitless array of choices. Credit and debit cards will be preferred by many of the people who will want to do business with you. The advantage of accepting credit cards is that you can be confident the credit card companies will pay you what you’re owed in a timely manner. But what does all that efficiency cost you? Up to 3% of the sales price of whatever you’ve sold, and sometimes an annual fee or more. Different companies—Visa, MasterCard, American Express, Discover—have different terms, so you’ll want to look into all of them. American Express is known for charging a bit more, but they also have great incentives for small businesses, so you have to weigh everything and decide what’s best for you. Accepting credit card payments can be as easy as buying a tiny device that attaches to your phone and downloading an app.

IF YOU’D RATHER NOT DEAL WITH PLASTIC, you can make use of PayPal or PaySimple, or you can check the US Small Business Administration website at sba.gov or CanadaBusiness.ca for other payment choices that might work for you.

MONEY GOING OUT

As great as it is to have money coming in from sales, the reality is that you’ll have EXPENSES, too, and you’ll need a way to pay for them. If you have employees, they’ll need to be compensated.

Some may be willing to work in exchange for a stake in the business you’re creating together. If you hire someone to get the word out and do all the publicity for your company, your publicist may be incentivized to help you grow if she’s guaranteed a bit of the proceeds.

If you can afford to pay someone for a dozen or so hours of work, there’s no need to give up a piece of your business. Paying the people who work for you and the people who supply you with tools, equipment, and services means you may need to understand payroll services and vendor services. An accountant can make sure all this is handled correctly.

Paying your employees also signals to them that they’re valued. Some businesses load up on unpaid interns, but that’s not the work culture you want to create, and it’s actually illegal in some places. Not to mention that asking employees to work for free wears thin over time. No one likes to feel taken advantage of.

BUDGETING FOR NOW AND THE FUTURE

This might not be as much fun as the creative side of your business, but in many ways it’s even more important. You need to keep your finances organized so you have an idea of how much money is coming in, how much is going out, and how much you’ll need for the future. You can accomplish all this with a basic spreadsheet (see appendix for a sample) that lists your income and expenses, and hopefully the two will even out by the end of a year. Of course, any money you have over and above your expenses counts as profit, and you have the choice of paying some or all of it to yourself as a salary, or investing some or all of it into growing your business. You don’t need to put everything back into the business, but you should have an idea of big expenses that may be coming down the line so you can budget for them. If you need to buy a piece of equipment—a new laptop, some tools, rent on an office space—you’ll need to account for those expenses and figure out when you’ll have enough money to be able to pay for them.

You may be able to find funding for some big expenses, or borrow for them, but you can also get them the old-fashioned way: by saving up.

PUT YOUR MONEY AWAY

Once you have money coming in you’ll probably want to open a checking account and let a bank hold onto your hard-earned revenues. Most banks make a distinction between a regular savings or checking account for personal use and one you use for business. For one thing, they may give you different interest rates, a different number of checks you can write without being charged each month, and other helpful services like the ability to borrow for small business expenses that may come along—but they may also charge extra fees for business accounts because of these additional services. Have a conversation with the people at the bank and find out what they can offer you to help your new business. You don’t necessarily need a mentor’s help, but she might have good advice to offer about navigating the system at the bank.

The good thing about having your money in a bank account is that it will be harder for you to spend it frivolously. If you need to get out your checkbook each time you have a business expense, you’ll be more careful about what you spend than if you’re carrying around cash. But more importantly, you’ll have a record of every dime you spend. That will be very helpful when it comes time to pay taxes or update your business plan.

ALWAYS HAVE A PAPER TRAIL

You need to keep good records of the money you earn and the money you spend. Credit cards and checking accounts can be handy for this, because they provide monthly and annual statements detailing everything you’ve spent, and you can keep track of your activity and charges online throughout the month. If you’re 18, you can apply for a credit card that you’ll use for only business expenses. But you should also collect receipts and keep them in a special place.

Organize your receipts into envelopes or files according to category, such as office supplies, web services, equipment—so you’ll be able to find them when you need them. Receipts are especially important when you’re paying with cash—otherwise you can quickly lose track of how much you’ve spent. Have a handy place to keep your receipts whenever you’re out—a ziplock bag works just fine—and then file them away in your folder system when you come home.

Once things get a little more complicated, or if you just like to use computerized worksheets, you can turn to a whole host of programs to keep yourself organized. QuickBooks and other similar programs allow you to set up income-and-expense sheets and can keep track of every dollar you spend, whether you’ve written a check or paid cash. When your business is earning a profit, you’ll begin paying taxes, and it will be enormously helpful to have everything organized through a bookkeeping program so you can figure out what you owe at the end of the year. Paying taxes may seem like a drag, but you can’t owe taxes unless you’re earning money, so having to pay them is actually a good thing—it means your business is thriving.

For more information on balance sheets, income-and-expense statements, and other business-related details, see the appendix.

WHAT’S AT STAKE

People talk sometimes about having a stake in a business—what that means is that they own a part of it. It could be a tiny fraction of 1% or it could be 49%. Ownership varies, but generally the greater part of a business an investor owns, the more input that person expects to have in the way things are done.

DO YOU HAVE TO GIVE SOMETHING UP WHEN YOU BRING IN INVESTORS? It depends. Some investors will want to influence how you’re spending their investment and others will be more hands-off, so be sure you have everything spelled out clearly—who is responsible for what—in your terms sheet.

The new Jumpstart Our Business Startups (JOBS) Act allows for funding partners to have an equity stake in your business and eases some regulations that made it harder in the past. This is good news for startups in need of funding.

THE BARTER SYSTEM

It may be that the last time you heard about the barter system was back in school when you memorized facts about trade, but the concept actually has a very useful function. Some of the best ways for a new business to get the goods and services it needs is by trading for them. In other words, if you can perform a piano concerto at your web designer neighbor’s anniversary party and you need someone to set up your website, see if your neighbor is interested in a trade. If you are creating an online newspaper and you need someone to do marketing for you, think about skills you have that you can offer. Maybe 10 hours of babysitting the marketing company owner’s eight-year-old will get you a marketing plan. Maybe another 10 hours will get you some business cards and 50 tweets about your business. Are you a website designer? Designing a company’s website could be a good trade for a free month’s rent at their office, coffee pods included. Be creative.

Remember that trading services is a cost-effective way to get what you need. Take advantage of the things you can do easily and quickly and trade them for the things that would take you forever. Do what you know how to do. Find people to help with the stuff that comes less easily to you—you’ll discover that you’re much more productive that way.