You’ve got an amazing business idea in the works…now you just need the capital to back it. Perhaps your business is already up and running but you’re looking to broaden your horizons. Welcome to the world of small business funding!
Though the task of acquiring initial startup money (or extra cash flow to cushion your budget) can be daunting, thankfully there are so many options at your disposal that you’re never stuck. We’ve compiled some of the top funding methods that are available to small businesses, so you can see which one suits you best and can help you make the most of your business.
Review these options carefully and you’re sure to discover your ideal funding opportunity.
One of the go-to loans for small businesses is a Small Business Administration loan. SBA loans are backed by the government and are disbursed specifically to help small businesses that may not be able to qualify through traditional lending methods.
The qualifications for an SBA loan certainly aren’t lax, however. You still need a decent credit score (680 or up), a 20% down payment, and management experience to prove you’re ready to run your own business and use the funds wisely. It also may take you up to 3 months to actually see if you’re approved. It pays off, though, as SBA loans allow you to borrow larger sums of money at lower interest rates.
With the rise of online lending, you don’t have to go to a bank anymore to get a loan. Online startup loans are a fantastic way to get your business rolling, especially if you only require a small amount of capital.
Online lenders are able to process your application much faster and you don’t need quite as high of a credit score. However, they aren’t able to loan in larger sums like you would see in an SBA loan. Additionally, online lenders often want to see that your business is bringing in a certain amount of revenue on an annual basis.
Another invention of the internet age, crowdfunding is an increasingly popular way to fund a small business, and it works entirely off of donations. Essentially, you would start a campaign on a crowdfunding site such as Kickstarter or gofundme and spread your profile across social media platforms. You request small donations, offering rewards or incentives for those who invest.
In most crowdfunding scenarios, you’ll need to pay a percentage of your total donations for using the site, and then there’s the cost of whatever you offered as your incentives. But you come out of it with no debt, no interest rates, and a reasonable chunk of change to kick off your small business.
This unusual loan form is almost a blend of crowdfunding and an online startup loan. It resembles crowdfunding in that you’re relying on a large number of strangers to back your business, and yet it is not a gift, but rather a loan that you pay back with interest. You apply for your peer-to-peer loan via an online lending platform, and your application is assessed by the platform and approved based on your credit rating and other factors.
While you will probably pay higher interest rates than you would with a bank loan, the application process is far more painless and you don’t need to have an established business income. This route generally entails lower late fees as well, but if you default your credit will take a swift dive, similar to any other lending situation.
Finding someone willing to invest a large sum in a risky venture may sound difficult, but these types of investors do exist. They’re known as angel investors, and they give funds to startups in exchange for a percentage of ownership in the company. It’s not a loan, so there’s nothing to pay back – but you do lose some of the control over your business, as you’re essentially adding on a partner who has a significant say in your company’s direction.
Family & Friends
Ever consider your wealthy old grandpop for a loan? Family or friends can be prime lenders if you know someone who has the means and supports your business idea. There’s no minimum or maximum amount that you can borrow from an individual, and the interest rates are incredibly low. You do want to actually hammer out a written contract, though, just to make sure there aren’t any misconceptions down the road. And don’t forget the whole family dynamic – things might get pretty weird at Thanksgiving if you’re sitting across from a relative who fronted money you weren’t able to repay.
If you’re sitting on a credit card with a high limit and a reasonable interest rate, that may be enough to cover the funds you need for a startup or even just for some extra cash flow. If it’s a personal card, you’ll need to keep detailed records of which purchases were personal and which were for the business, as that can create some confusion come tax time. Additionally, you don’t want to go this route unless you are positive that you’ll be able to make monthly payments in time, otherwise you’ll be stuck with late fees and some blemishes on your credit.
You can also apply for a business credit card if you’ve registered your company with the state. Then you can put business expenses directly onto this separate credit card without having to worry about mixing up personal and business transactions. Beware, again, of charging your card if you aren’t certain that your income will be able to cover the expenses, as this may negatively impact your ability to get funding in the future.
It may not be the most attractive option, as it poses a decent personal risk, but if you have money stashed away for a rainy day and aren’t able to get a loan, you can always consider investing your own personal funds. This allows you to retain full control over your business and you won’t pay any interest or fees. However, if your company doesn’t perform well or you hit hard times, then you lose your own money and don’t have that cash to fall back on. If your business is in a relatively safe industry and you’re confident it will grow as you expect, then investing your own money gives you freedom that you simply won’t have if you’re tied to a loan.
Along these same lines, you can also take from your retirement fund to finance a small business. This is known as a “Rollover as Business Startup” or ROBS, and it essentially allows you to rollover your IRA to a separate 401(k) so that you can access your retirement funds more easily. You are then free to invest them into your startup venture.
This process can be complicated and must be carefully administered to keep you from paying heavy fines, so you’ll need to work with a 401(k) professional who can advise you in how to go about it. Additionally, one note to keep in mind is that you are taking money that has been set aside for your retirement. If you don’t have a substantial amount saved from which to pull, it may be unwise to use these funds.
Do you own your own home? You may be able to use that to fund your startup! Yet another form of personal investment, home equity loans allow you to borrow against the percentage of what you own. In other words, if you have paid off $50,000 of your $250,000 home, that $50k counts as equity from which you can borrow. Most lenders require that you have paid off 20% or more before you can take a home equity loan, so this works best if you have been in your home for a while. If you feel you won’t need such a large sum, you can take a home equity line of credit instead, which allows you to borrow smaller amounts in intervals up to a certain limit (similar to any other line of credit).
This method affords you a lower interest rate than with a typical loan or credit card. The main risk in home equity loans, however, resides in the fact that if you fail to make payments, your very home is at stake. Default for long enough and you could lose your house and tank your credit rating as well, causing serious trouble when you try to find a new home!
Bonus: Bad Credit Loans
If you’re unable to secure a loan due to bad credit and your family and friends aren’t up for donating, there are lots of options for bad credit loans. They range in type from short-term loans to business lines of credit and each of them have different qualifications they look for, but they all are similar in that they are for individuals with poor or no credit. The time it takes to get an initial approval is very minimal, and you can borrow even large sums of money. The main drawback to these is their high interest rates, but if your business has the opportunity for significant growth and this is the only available option, this may be the perfect method for you.
Finding capital for your small business doesn’t have to be an insurmountable challenge. With the diversity of options that are available, you will certainly be able to find one that will fit your company and help you get where you need to go.