It's important for entrepreneurs to focus on using their own money before looking for outside support.Jeff StibelChairman, President and CEO of Dun & Bradstreet Credibility Corp.
Entrepreneurs, by definition, are passionate about the new product or service that they're working to bring to market. Nothing is more threatening to that passion than the realities of financing a business. And the truth is, financing is both the No. 1 thing entrepreneurs worry about and the last thing they should be worrying about. Their main focus should be growing their business and providing the best possible product. Of course, capital is a necessary evil.
In conjunction with Pepperdine University, my company just released the Pepperdine Private Capital Access Index, Fourth Quarter 2013 study, which showed that there has been a 5 percent rise in the demand for capital since last year. That's great news, because it means that more owners are optimistic about market conditions generally, and their own growth potential specifically. But entrepreneurs must remember that the keys to start-up success are still the same as they've always been: old-fashioned blood, sweat and tears … with a liberal dash of creative networking. Those who wait for the start-up ecosystem to provide them with all of the resources they need may never get a business off the ground.
Entrepreneurs should break their financing needs and opportunities into two buckets to create their own mini-ecosystem where their start-up can thrive: One involves creative personal financing, and the other taps "other people's money." It is important for entrepreneurs to focus on using their own money before looking for outside support.
That means using every bit of one's own personal resources for the new venture. It means working for free and not taking a salary until the company is profitable. It means leveraging your own capital for your business, whether taking on credit card debt, using personal savings, borrowing against a 401(k) or leveraging home equity. These methods are the simplest source of capital and show personal investment in the business—a requirement for making others comfortable enough to invest.
Creative personal financing is a little more nuanced. It involves begging, borrowing, pleading, and trading (no stealing, please); above all, it means using your passion to secure additional capital resources. Many an entrepreneur has gained buy-in from friends and associates willing to lend their time with no upfront cost. Equity can be offered in exchange for labor. Credit terms can be negotiated from vendors: Perhaps Dell will provide computers with interest-free financing or a supplier can offer extended terms on a first order. Something as simple as asking an established business owner to share contacts, or a commercial landlord to provide discounted temporary space, can make the difference between success and failure, so the importance of building or becoming part of a network of start-up-friendly individuals and businesses cannot be overstated.
(Read more: Crowdfunding 2.0: A new era for start-up finance)
Only when all methods of personal financing are exhausted should entrepreneurs look into outside financing, or other people's money. Often a business cannot grow without outside financing, but entrepreneurs must be aware of the major responsibility that comes with accepting money from others. An entrepreneur is morally and ethically obligated to return borrowed money. It's simply the right thing to do. Entrepreneurs should start with friends and family before asking strangers. Make it official: Entrepreneurs should write down financing terms they have arranged, and offer either interest or equity (or both) in exchange for capital to grow a business.
When it comes to borrowing money from strangers, there are plenty of resources to learn about traditional lending sources: venture capital, bank loans, guaranteed loans backed by the U.S. Small Business Administration (SBA). The SBA just announced that they have lowered fees for loans under $150,000 to zero, and that's great news for start-ups. But like all forms of other people's money, these loans should be used cautiously. Entrepreneurs seeking this type of financing for their start-ups will almost always have to personally guarantee the loans, risking their personal credit and even bankruptcy if they are late with payments or default.
There are more sources of alternative funding sprouting up every day. Companies like Lending Club and Kiva provide crowd-based loans, also known as peer-to-peer loans, while firms like Kabbage provide inventory-backed loans. Kickstarter and Indiegogo are good options for start-ups that are creating products, as they allow start-ups to essentially presell their offerings before they are made. For a company that has an outstanding product and just needs the capital to produce it, preselling is brilliant: It's leveraging other people's money, but with a clear path to make good on that debt.
(Read more: Kickstarter's 10 biggest success stories)
Once business owners find ways to use creative financing options, it's amazing to see how quickly the entrepreneurial ecosystem will respond by providing even more resources. It's up to founders to take the first step.
—By Jeff Stibel, chairman, president and CEO of Dun & Bradstreet Credibility Corp. He is the author of the New York Times bestseller "Breakpoint," a book about the future of business and technology, and former CEO of Web.com.