Business ideas come easy to some, but what happens when you have a good idea but no money to get started? Countless entrepreneurs have run into funding challenges when looking to found and build a new business. Here are ten ideas to get you started when looking to get money for your business.
1. Personal Savings
The first place to look for capital when starting a new business is your own bank account. If you are smart with your personal finances and keep good habits, you should have an emergency fund and retirement savings, but you should avoid tapping into those whenever possible.
Instead, try to draw on your own cash and stretch it as far as possible. “Bootstrapping” is a term commonly used to describe starting a business in such a manner. Succeeding in a bootstrapped business generally requires you to be very thrifty and tight with the budget, but at the end you could come out as the sole owner of a debt free, successful business. That’s the best possible scenario for you as a new business founder.
2. Credit Cards
Tread with caution if you want to tap into your credit cards for your business. Credit cards are an easy way to get fast access to cash for your business, but that cash comes with a big price tag. The current credit card average interest rate is 14.87 percent, according to this household credit card debt survey. That expensive credit card interest adds up very fast when you are starting a new business and can’t pay the balances off right away.
Also keep in mind that borrowing on credit cards will lower your credit score. The higher your balance in proportion to your limits, the lower your credit score. If your credit score falls too much, you might find yourself unable to qualify for other loans, like a home loan or business loan.
3. Home Equity
If you want to borrow at a lower interest rate, but still don’t mind borrowing using your personal finances, you can tap into your home equity for either a fixed loan (e.g. second mortgage) or a home equity line of credit, also known as a HELOC.
The big benefit of a home equity loan to finance your business is the lower interest rate. When your loan is attached to a valuable asset like a home, the bank isn’t as worried about a loss and is willing to lend at a lower interest rate than it would with credit cards or other unsecured loans. There is a huge “but” with home equity loans, however. If you don’t make your loan payments, the bank can take your house. That is a big risk for your new business idea.
4. Friends & Family
If you want to get money from someone other than yourself, start with the people you know best: your friends and family. Just remember to put everything in writing so everyone has the same expectations going into the arrangement.
Some founders choose to borrow from friends and family in the form of a loan, while others ask their friends and family to invest in the business and become part owners. Just remember that if your friends or family have equity in your company, they have a vote in how you run the business. And if you don’t pay back your loans, you could ruin the relationship forever.
5. Angel Investors
If friends and family are not a good option, the next place to look is angel investors. While the term makes them sound like something special, you can think of angel investors simply as rich people who make investments in new companies. But you can also expect angel investors to be more aggressive with their desire to participate in the business.
In most cases, getting outside investments from an angel comes with their experience and expertise. This experience can be hugely valuable to the business. On the other hand, it could be like having someone from Shark Tank yelling at you about poor results or a disagreement. If you can build a good working relationship with an angel investor, it is often a win-win for everyone involved.
6. Venture Capital
If you want to take it up to the big leagues, the next place to look for funding is venture capital. Venture capital comes from a business that invests in many startups expecting a number of them to fail, and a number to offer huge rewards of at least ten times their initial investment.
Venture capital is best if you plan to really grow your company into something big, as that is what the investors will expect if they sink in their coveted venture capital dollars. Also expect the VCs, as they are often called, to demand a significant portion of equity in your business, a board seat, and a level of control over your business. If you want to run a big, public company, venture capital is par for the course. If you want to keep it family owned and operated, skip venture capital all together.
7. Startup Incubator
Startup incubators are a hybrid form of advising, venture capital, and a business growth program all in one. Popular incubators include Y Combinator, Techstars, 500 Startups, AngelPad, and Seedcamp. Ideally, at the end of an incubator program you leave better prepared to run your business and with funding to give you a bit of a runway and a path to even bigger success.
Incubators are often best for younger founders (20s and 30s) of online technology startups who have quite a bit of time to pour into the business. Participation often means moving to live near the incubator for a period of time, and founders are expected to put in long hours to make the investment worthwhile.
8. Online Business Loan
If you don’t want to give up any control over your business, an online business loan may be the best option. Online business loans are best for small and midsize businesses that can prove they have an existing revenue stream. If you’ve been in business at least two years and have good personal and business credit, you can often apply and get approved in as little as a few hours and get your cash as soon as the next business day in some cases.
Online business loans are fast, but sometimes they come with higher interest rates than banks. Depending on your credit, interest rates can be as high or higher than some credit cards! But if you need quick cash for working capital, inventory, equipment, or to refinance an existing loan, they can make a lot of sense.
9. Traditional Bank Loan
Traditional bank loans often lead to lower interest rates than online loans, but they take much more work to get. Bank loans usually mean going into the bank and working with a banker to complete a detailed application and undergo a thorough review process. However, the bank is more likely to treat you as a partner and may mentor and guide you through the loan process, and might even work with you to help your business in other ways.
Banks may want some form of collateral when lending, which helps you secure a lower interest rate. However, you can count on waiting much longer for your application’s approval along with piles of paperwork. If you are patient and have the time, you may be able to save money with a traditional bank loan.
10. SBA Loan
The last stop on today’s funding train is the Small Business Administration, or SBA. SBA loans are business loans backed by the United States government, similar to some student loans you may have come across in the past. Because it is backed by the government, banks are willing to lend at much lower interest rates than traditional bank loans.
Of course, there are strings attached. They come in the form of a pile of paperwork and wait time, as the loan must be approved by both the bank and the government. But at the end, you have access to capital at a lower cost, which can be a big win for your business.
Think Outside the Box
You may feel pigeonholed into a specific type of loan or funding because of your background or your business, but that is rarely the case. You have plenty of options to find funding depending on your goals. Of course, excellent credit helps your case tremendously. Whatever you decide, make sure you can afford to pay back what you borrow and have plans to use the funds for the right reasons. If you do, you should see great success in the future of your business.
This article was originally written on January 22, 2018.
As an aspiring entrepreneur, I find this helpful. I agree with all that you said in your article. People who wants to start a business use their personal savings when setting up a business, often referred as bootstrapping. Here in the Philippines sole proprietorship is very popular because it’s easy to set up business here and also, there are firms that is willing to help you with regards to business registration.