Best Ways To Finance A Business Start-Up
1. Your Own Assets
Self-funding may not be realistic for many entrepreneurs. Yet the fact remains that (according to the nonprofit association SCORE) 57 percent of start-up business owners use their personal savings for start-up capital. It may not be the most appealing prospect — it’s always more fun to spend someone else’s money — but sometimes, entrepreneurship entails sacrifice.
You might not be flush with cash, but you can always try doing things to change that. You could sell your car and just use Lyft, or the bus, to get around. Sell your house and rent an apartment above a restaurant. Or keep the house and get a home equity loan or line of credit. Just be sure to make the payments, or else you’ll be wishing you got that apartment when you had the chance.
You can even borrow money from your 401(k) or your IRA savings account. These are obviously not risk-free options, and should not be your first resort. But if you were looking for a life of minimized risk, you’d have chosen a more staid line of work. So be careful, but know that these options are available to you. In fact, your business might be seen as a more worthwhile investment if investors see that you have a personal stake in its success.
If you’re thinking about tapping your retirement accounts, you may want to look into Rollovers as Business Startups (ROBS). For a fee, a ROBS funder will allow you to tap your retirement funds tax-free and use them to finance a new business or acquire an existing one. Keep in mind, this is still a risky practice that can jeopardize your retirement savings, and the fees can be significant.
2. Friends and Family
Another less-than-ideal funding solution involves hitting up your friends and family for money. It’s certainly a tempting route to go. Banks and investors will likely demand a more thorough accounting of your business structure and creditworthiness than will your Nana. She’s probably not going to charge you the same level of interest, either.
However, it’s one thing to imperil your own finances with the inherently risky activity of starting a business. It’s quite another to put your close personal relationships in jeopardy. Consider the risk to which you’re subjecting your loved ones. Also consider the fact that having your family and friends’ money involved may drive you to stick with a losing proposition longer than is rational, should your business start to tank (as so many do).
If you do decide to seek business funding from friends and family, do yourself a favor: go through all the proper legal channels and have the paperwork professionally prepared. You should also make sure to request a loan, not equity investment. Ask for the latter, and your friends/family will have the legal right to be involved in major decisions involving your business. Do you really want Uncle Earl playing a role in running your company? He still uses Internet Explorer, for heaven’s sake.
3. Personal Loans
When you’re launching a start-up, business loans can be quite hard to obtain, mostly due to your lack of existing business revenue. It’s a classic “chicken and egg” problem. This is where personal loans can become a solution. Whereas getting a business loan is dependent on characteristics like the health and creditworthiness of your business, getting a personal loan is entirely dependent on your characteristics. Expect lenders to closely scrutinize your credit score (640 is typically the bare minimum), source of income, debt-to-income ratio, and proposed use of the loan.
Personal loans generally top out at $35K, though a few lenders cap it at $50K or higher. This is but a fraction of the amount you can borrow with a business loan, which can be $1M or more. Simply put, start-ups are inherently risky ventures, so the amount of capital lenders are willing to lend you is going to be strictly limited.
If you think a personal loan might be just the ticket for your business start-up, check out our guide to obtaining personal loans for business.
4. Credit Cards
Credit cards can always help you out of a jam in your personal life. The same applies to financing your start-up.
Small business credit cards can have limits as high as $50,000. Considering that this is funding you can use without having your business plans scrutinized by some grand poobah, credit cards may be one of the most convenient means of financing a budding business. Of course, with this convenience comes high interest rates. You don’t want to let your credit card debt linger with the interest piling up, so plan to pay it back as soon as possible, within the no-interest grace period if possible.
Free money: what better way could there be to fund your start-up? Unfortunately, obtaining a grant to fund your young business isn’t easy. That’s why you don’t hear about it happening too often. However, grant programs do, in fact, exist. There are federal grant programs, state and local government grant programs, and some private grant organizations as well.
You can find grant programs tailored to specific types of businesses, as well as certain segments of the population. There are small business grant programs for veterans, women, single mothers, and other groups. Be prepared to write an extensive and detailed proposal if you want any hope of landing a grant, however. Competition for grants is tight, and only the most compelling pleas are heard.
Grant programs can offer amounts as small as a few hundred dollars to recipients, so don’t expect to ride a wave of free money to business success. However, if you find a program that you match up well with and have a particularly poignant story to tell (and the time to tell it), you have nothing to lose by giving it a shot.
6. Bank Loans
Entrepreneurs trying to launch their first business venture are more likely to secure just about any of the above types of loans than a bank loan. Banks tend to want to see a history of profit before they’ll let you sniff their money — an obvious problem for a new start-up.
Nonetheless, if you have a significant amount of collateral (and yes, that’s a big if) and excellent credit, don’t count out bank loans as a possible source of capital. A commercial loan from a bank can resemble a mortgage: there’s a fixed interest rate, fixed monthly/quarterly payments and a maturity date.