Having a billion-dollar idea for a new company or start-up is really great. But how about now? You might need a website, some office space, a tech team, and, of course, at least enough cash coming in every month to pay your rent.
Which means, you need money. Whether it is a cool new application or a cool café, most businesses and entrepreneurs need at least a little money to really get off the ground in their early days.
Ways to Raise Money for Your New Business
Actually, the chances of success are long. Only about half of new businesses have survived for five years, and only a third remain in operation after ten years. Nevertheless, a small percentage is maturing into stable small to medium businesses, while a microscopic fraction are a legend, such as Apple or Hewlett-Packard, a garage-born company that has finally ascended to the highest ranks of American business.
Before your business have any hope of becoming a legend or even just profitable, you need to find a way to finance its birth. The SBA stated that in 2009, the Ewing Marion Kauffman Foundation estimated the average cost of starting a new small business in the United State to be about $30,000. To estimate how much it will cost to launch your business, check out the online startup cost calculator, such as that provided by Entrepreneur.com. Although the number may seem very high, entrepreneurs now have a variety of options in terms of financing startups.
1. Self-Financing
Although self-financing your own startup can be relatively easy, but usually, it comes with a big downside: You are absolutely on the hook if the business doesn’t going well. However, it can be an attractive option, and if you are in the position to get your needed funds from your own reserves, there are a various ways to do it.
A. Tap Your Personal Savings
Pressing your own piggy bank is the easiest way to finance a small business. Whether the money comes from your checking account, funds stored in an old money market account, or a family inheritance, by using your own money not only prevalent but also shows a business owner’s commitment to other potential investors, which can ultimately help win additional funding from third parties.
B. Sell Your Personal Assets
Perhaps you have real estate, stocks and bonds, or valuable family heirlooms that you are willing to sell in order to get cash to fund your business. Selling assets for cash is a time-tested way to get money, but there can be tax implications related to sell certain assets, especially real estate and stocks. Be sure to take that into account before you take the risk; if not, you might find yourself facing an unexpected capital gains tax from the IRS.
C. Use a Credit Card
Credit cards can provide a quick and easy way to finance the purchase of goods needed to launch a business. Keep in mind that credit cards also come with high interest rates for balances that remain unpaid at the end of the month. As of April 2015, interest rates on unsecured credit cards ranged around 13% to 22% for those who have good credit scores. However, if you miss a payment, that rate can increase as high as 29%.
D. Borrow Against Your Home
If you own a home, you can borrow from equity on the property. Home equity loans (HELs) and Home equity lines of credit (HELOCs) are popular ways to access your home’s value. However, since the financial crisis, lenders have significantly tightened the restrictions on loans and credit lines.
E. Take Out a Bank Loan
If credit card interest rates scare you and you don’t own a house, you can ask the bank to lend you the money to start your business. Personal bank loans come with lower interest rates currently between 6% and 13%, depending on your credit history.
F. Cash in Your Retirement Accounts
While the funds in your IRA or 401k might seem a tempting source of money, there can be very steep penalty for early withdrawals. However, some financial advisors promote a plan that claims to allow individuals planning to launch a new business to potentially avoid the penalties.
2. Small Business Administration (SBA) Loans
Created by Congress in 1953, SBA did not lend directly to small businesses. Instead, SBA offers a variety of guarantee programs for loans made by eligible banks, credit unions, and nonprofit lenders.
Regardless the effects of the economic crisis and recession, SBA said that the loan program are experiencing “unprecedented growth.” According to SBA, in fiscal 2014, the number of 7(a) loans extended to small businesses surged 12% over the previous year, while the dollar value of those loans increased 7.4% compared to fiscal 2013.
A. 7(a) Loan Program
This loans are a very prevalent means of funding small businesses, and can be used to launch a new business or expand an existing business. There is no minimum 7(a) loan amount, though the SBA states that the program won’t return a loan of more than $5 million.
B. Microloans
Offered through certain nonprofit community-based intermediary lending organizations, SBA Microloan Program provides loans of up to $50,000 to finance startup and expansion costs for small businesses. Microloans can be used to finance the purchase of supplies, equipment, and inventory, or as working capital for businesses. However, it may not be used to pay off existing debts. SBA said that the average microloan is around $13,000.
3. Crowdfunding
Businesses have been used the Internet to sell and market things since the 1990s. However, over the past decade, the web has become a new source of financing as well.
Using crowdfunding websites such as entrepreneurs, Kickstarter, charities, artists, and individuals can post online requests for cash. For instance, in 2013, Hollywood screenwriter and producer Rob Thomas used Kickstarter to raise $5.7 million to fund a movie project based on the cult TV series “Veronica Mars.” More than 90,000 people promised small amount of money to realize Thomas’s goal. By 2015, Kickstarter made pledges worth more than $1.6 billion for more than 200,000 separate projects, of which more than 81,000 were successfully funded.
4. The Last Word
Unless you have become a millionaire, arranging financing to launch a new business needs serious planning and effort. A diligent entrepreneur must consider the benefits and downsides of available funding options and determine which sources of cash provide the greatest flexibility at the lowest cost.
But you don’t have to limit that options. Many small businesses are started with money obtained from a mixture of various sources. Even if you land a significant bank or SBA loan, you may still need extra money from friends and family, or yourself, to make your startup dream come true. And there will always be unexpected events and costs.
Fortunately, the emergence of new financing sources such as crowdfunding and peer-to-peer lending means that now, prospective small business owners have a greater range of financing options at their disposal than they have ever before.
Seven Places To Find Money To Start A Business
The good news is, there are several places to get funding assistance and many that are often ignored. Read on for a first-time founder’s guide to find a place for funding, and what type might be right for you.
1. Start With Bootstrap
When you are first getting started, many entrepreneurs use “bootstrapping,” which means financing your company by collecting all the personal funds you actually can find. This usually includes your savings account, credit cards, and any home equity lines you might have.
In many cases, using the money you have instead of borrowing or increasing is a great approach. In fact, some entrepreneurs choose continue to bootstrap until their business is profitable. This can be useful because it means you won’t have extensive loans and monthly payments that make you fall out, especially if you experience problems along the way.
2. Consider Friends and Family
Asking your friends and family to make money might seem like a daunting prospect—but tapping on the people closest to you is often a good first step before getting external funding. And hey, if you try, it can never hurt to ask. While Aunt Irene is might not be in a position to finance your entire new social network for dog owners, she might be impressed enough to throw you a few thousand to help you get rolling and join the site to find some new Fido playmates.
Before you ask your friends and family for cash, you should prepare a business plan. In this way, you can explain to them exactly what you sell, what you plan to charge, how you will make money, and whether you ask for a loan, an investment, or a gift.
3. Explore Alternative Funding Sources
If you are seeking for a relatively small amount of money (ranging from $25 to $5,000), there are several micro-loan organizations that lend to start-ups and entrepreneurs, such as Accion and Kiva. This website supply low-income entrepreneurs in the United State or those who work for social good, some only provide micro-loans for those living below the poverty line. But if you think you might be eligible, check out their website for more information.
Another alternative are the popular crowdfunding sites, such as Kickstarter and IndieGoGo, which give you a platform to get money from individual, small supporters throughout the web. You will prepare a campaign and name the target amount of money you want to get, as well as create additionals for donors who promise a certain amount of money. Then, you get money for the campaign over a certain period of time.
With Kickstarter, you will only get money if you increase the full amount of your goal, but IndieGoGo will let you save anything you raise for discounted proceeds.
4. Look for Local
If you launch a small company, you will definitely want to verify your local small business development center. Many universities have one, and the SBA alone has 63 around the country.
These centers not only can help connect you with groups of networked entrepreneurs and angel investors for funding, they can help you determine what types of loans and funding you might be able to master and help you apply. Your local chamber of commerce can also be a treasure trove of information and guidance on where to get local funding. Many big cities have programs and organizations that exist only to bring business into the local community.
5. Consider Taking Out Loans
If you can show that you are starting to get traction and making money, you might be able to qualify for a traditional bank loan. Many banks, such as Wells Fargo and Bank of America, have recently announced increased commitment to small business. Even though each bank and individual situation differs, this might be a good bet if you are seeking for funds between $5,000 and $500,000.
6. Look at the Angels
If you have a tech startup, you’ll might eventually need more capital to really start your business, to hire people or get office space, for example, than bootstrapping and crowdfunding will benefit you. You need to reach outside investors. A good place to start is the angel investors, usually established business professionals with high net worth who want to invest in promising companies. Usually, an angel will invest from $10,000 to several million dollars.
To find angels, you can ask other entrepreneurs in your network, or see the Angel Capital Association, which counts more than 330 angel investor groups nationwide. You can also check out AngelList, a website that helps entrepreneurs connect with interested investors. So far, the site has helped more than 1,000 startups be funded.
7. Ready to Launch
Finding fund can be the hardest part of getting your business off the ground, but also the most useful. Once you have saved, got an approved for a loan, or found other people to invest in your business, you can go back to, or start your dream job.
Although it can be a long way to success, finding allies along the way whether they are friends or angel investors to help keep your business afloat can make all the difference in the world. Good luck!
