Personal Savings, Retirement Accounts, Friends & Family, Personal Loan, Credit Cards, Grants, Bank Loan, Angels, Crowd-Funding, Kickstarter, Indiegogo, GoFundMe, Funding Contest, Peer-to-Peer Lending, MicroLoan, Kiva, Accion, Credit, PreSales, PayPal Loan, Final Thoughts
When launching a business, the essential components of your success are the innovativeness of your Ideas and your willingness to put in the work required to see those ideas come to life. In the milk of capitalist achievement, the cream rises to the top. With gumption, know-how, and a little steely-eyed grit, there’s nothing stopping you from turning all that $$$ currently languishing in your Trust Fund into a thriving business enterprise. Go ahead, make your mark on an opportunity-laden world !!! Wait, what’s that you say? You don’t have a fat trust fund to draw from? In that case, looks like you’ll have to raise some capital.
Beg, Borrow or Steal? The prospect of going, hat in hand, to beg for money from the holders of capital isn’t one that appeals to most Entrepreneurs. It probably wasn’t the aspect of building a business that occupied your fondest dreams growing up. Nonetheless, for those of us without inherited wealth, borrowing money to start a business is a necessity. Let’s explore the ways you can get your mitts on some Startup capital for your new Business venture.
1) Personal Savings
Self-funding may not be realistic for many Entrepreneurs. Yet the fact remains that according to SCORE, 78% of Startup owners didn’t seek Startup financing outside of personal savings or job income in their first year. You might not be over-flowing with cash, but you can always try doing things to change that. You could sell your car and use the bus to get around. Blah! Sell your house and rent an apartment above a Restaurant. (If you don’t mind eating scraps & don’t have a family) Or keep the house and get a Home Equity Loan or Line of Credit. Just be sure to make the payments, or you’ll be in worse shape
2) Retirement Accounts
Another option is to borrow money from your assets. You can 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 (unless it’s on the beach). But if you were looking for a life of minimized risk, you should have chosen a more risk-free 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 me) For a small 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.
3) Friends & Family
Another solution is to ask your friends & family for money. However, it’s one thing to endanger 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 using money from friends or family might drive you to stick with a losing proposition longer than is rational. If you do decide to seek business funding from F&F, 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 want that?
4) a Personal Loan
When you’re launching a Startup, Business Loans can be quite hard to obtain – mostly due to your lack of existing business revenue. It’s a classic “it takes $$$ to make $$$” problem. Situations like these are where personal Loans can become a solution. While getting a B Loan is often dependent on characteristics like the health and credit-worthiness of you, getting a personal Loan is entirely dependent on your personal characteristics. Expect lenders to closely scrutinize your Credit Score, source of Income, Debt-to-Income ratio, & proposed use of the Loan. Personal Loans generally top out at $35,000, although a few lenders cap it at $50,000 or higher. This amount is a small fraction of the amount you can borrow with a B Loan, which can be $1 million or more. Simply put, Startups are inherently risky ventures, so the amount of capital lenders are willing to lend you is going to be strictly limited.
5) Credit Cards . . .
can always help you out of a jam in your personal life. The same applies to financing your Startup. Small Biz CC 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 big wig, CC may be one of the most convenient means of financing a budding business. Of course, the convenience of CC are balanced out by high interest rates. You don’t want to let your CC debt linger with the interest piling up, so plan to pay it back asap – within the no-interest grace period if possible.
Free money? What better way could there be to fund your Startup? 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 exist. You might be able to get a Grant from a number of sources, including:
- Federal Grant programs
- State & local Govt Grant programs
- Private Grant organizations
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, & other groups. Be prepared to write an extensive & detailed Proposal, if you want any hope of landing a Grant. Competition for Grants is tight, and only the most compelling pleas are heard. Grant programs can offer amounts as small as a few $100 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. Do the Research.
7) Bank Loan
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 Startup. Nonetheless, if you have a significant amount of collateral, & excellent credit, + industry experience, 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 & a maturity date.
8) Angel Investor
They’re wealthy business people who finance Startups that have the potential to make them even wealthier. Angel investors don’t offer Loans; instead, they offer equity investments, which buy them a share of the ownership of your company. According to Entrepreneur Zine, Angel investments often amount to around $600,000, so we’re not talking small change here. It’s a very tempting funding avenue to pursue if you’ve got more potential than cash on hand. But beware — you’ll also be giving up 10% – 50% of your business. If you think you can make it work, Angel investors are quite a tempting source of capital, considering you won’t have to make payments with interest on the investment.
Crowd-Funding takes the traditional approach to raising Startup capital and turns it on its head. Instead of bringing your Sales pitch to investors & institutions hoping to be heard, you get a platform on which to lay out your plans and your needs for your budding business. By utilizing the advantages of the internet, you give investors the chance to come to you — a much more efficient means of pitching woo to your potential funders. Different Crowd-funding websites have somewhat different ways of operating. We have expended on some of the most popular options in the next few sections.
By far the most popular crowd-funding platform in existence, Kickstarter has become synonymous with crowdfunding. On their website, Kickstarter boasts that over 19 million people have backed a project, over $5.4B has been pledged, and over 190,000 projects have been successfully funded. Kickstarter is what’s known as a “rewards-based” fund-raising platform. Rather than invest in the pursuit of financial or equity return, investors typically get a “reward” for their generosity. In most cases, backers get to use the end product or service in advance of everyone else. Kickstarter is a fine option for the entrepreneur with a compelling pitch to make, but keep in mind – the platform releases the funds donated to your business only after your campaign reaches its funding goal. Only about 36% of Kickstarter campaigns reach their funding goal. The rest fall short, in which case the campaigner gets nothing.
Indiegogo started as a fund-raising platform for independent films, but has since expanded to become a general purpose crowd-funder. Today, Indiegogo offers opportunities in even more business categories than Kickstarter. Although the platform doesn’t get the same degree of media attention as Kickstarter, Indiegogo actually has more live campaigns going at any one time than does Kickstarter. That may be because, unlike their better-known competitors, Indiegogo crowd-funding campaigns don’t necessarily have to meet their fund-raising goal to receive their funds. All-or-nothing funding campaigns are offered by Indiegogo, though, as many backers may find that a more attractive proposition. One important note: unlike Kickstarter donations, Indiegogo investments are not refundable.
GoFundMe is a crowd-funding platform most often used for personal causes & unfortunate life events. However, you could certainly attempt to raise Startup funds through the site. This platform is not linked to an existing community of investors. Instead, donations are most likely to come from those in your own personal network, as well as those to whom you can get the word out. To this end, GoFundMe is optimized for social sharing. With GoFundMe, there is no all-or-nothing funding requirement. However, you will have to pay the same fees regardless of whether your campaign raises $2000 or $20. If your new business is related to some kind of personal or social cause, GoFundMe is a crowd-funding avenue worth pursuing.
13) Funding Contest . . .
are a non-traditional means of raising money for a Startup. Then again, tradition is over-rated. Programs like the Amazon Web Services Start-Up Challenge and the MIT $100K Entrepreneurship Competition offer Startups the chance to compete for thousands of dollars in funding every year. These contests receive an overwhelming number of applicants, as you can imagine. Make sure to present your pitch in a unique & compelling way. Your ideas need to stand out in a sea of thirsty funding seekers.
14) Peer-to-Peer Lending
P2P Lending sometimes known as Social Lending or Crowd Lending, takes the crowd-funding model of Kickstarter and combines it with more traditional Lending practices. P2P services are essentially matchmaking services that connect casual investors with businesses that need funds. P2P Loans have two primary advantages over traditional Loans. 1) the application process is usually online. You don’t have to meet with some stuffed suit or open your business premises for inspection. The entire process can be done at home, 2) the process for getting approved and receiving funds is usually much faster than with traditional Lending. –3) The downside is that P2P Lenders tend to be particularly risk-averse when it comes to Lending to those with iffy credit.
MLs exist for the benefit of borrowers who fall short of the collateral & cash flow requirements necessary to acquire traditional bank Loans. Because MicroLoans are for small amounts of money, they are considered less risky than other types of business financing. Loans of $50,000 or less are generally considered MicroLoans. You might be able to get this type of financing from sources such as non-profit or online Lenders.
16) SBA MicroLoan
As part of the SBA Small Business Loan Advantage program, SBA lenders are encouraged to make smaller business Loans with lower interest rates (between 6% and 8% annually) to qualified businesses with good credit. (ie, non-profits are particularly likely to be eligible for such Loans). According to the SBA, the average such Loan size is $13,000, and the maximum length of an SBA MicroLoan is six years.
SBA MicroLoans must be used for the following specified purposes:
- Working capital
- Inventory or supplies
- Furniture or fixtures
- Machinery or equipment
An SBA MicroLoan cannot be used to pay off existing debts or to purchase real estate.
Kiva is a non-profit Micro-Lender that offers Loans with 0% interest and no collateral. Pretty GR8, huh? Kiva offers a maximum possible borrowing amount of $10,000, so their Loans are decidedly micro; Plus, the application process is long & arduous. On the other hand, 0% interest and no collateral is attractive. Kiva is known for treating its users with a personal touch, which is decidedly not the norm in this field. In an industry rife with predatory practices, Kiva strives to be a (+) community force, and that’s something I can get behind.
18) Accion Loans
Accion is another private non-profit Micro-Lender. Unlike Kiva, their Loans do come with interest (8% – 22%) and can involve collateral requirements. However, Accion Loans can be as much as $50,000. Not only does Accion offer Micro-Loans, but they also provide financial education, by holding workshops & events around the country – geared towards getting emerging Startup on their feet. They also enjoy a reputation for transparency and excellent customer service.
19) SBA 7(a) Loans
An SBA 7(a) Loan is a Loan partially guaranteed by the SBA in which the Lender agrees not to exceed certain limits on interest rates and other Loan terms. The program is designed to help borrowers who would be unlikely to qualify for a commercial Loan from a bank. To qualify for an SBA 7(a) Loan, you must demonstrate that the SBA wasn’t the first place you went looking for money. For Startups with demonstrable potential, the 7(a) program may be worth considering.
20) SBA CDC/504 Loans
Another SBA Loan program, CDC/504 Loans are tools with which the govt helps certain businesses pursuant to specific public policy goals, such as energy efficiency or the promotion of minority-owned businesses. According to the SBA, CDC/504 Loans may be used for the following purposes:
- The purchase of land, including existing buildings
- The purchase of improvements, including grading, street improvements, utilities, parking lots and landscaping
- The construction of new facilities or modernizing, renovating or converting existing facilities
- The purchase of long-term machinery and equipment
Clearly, these aren’t the things most Startups are looking to do, but if your new venture is involved with any of the above, and your business purpose is seen by the SBA as furthering their public policies, you may just want to investigate this program.
21) Trade Credit
TC is the credit extended to you by Suppliers who let you “buy now & pay later”. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you’re using TC. Since TC is trust-based, it’s not easy for a Startup to obtain. However, if you really have your stuff together, you can pitch this arrangement to your Suppliers just as you would if you were applying for a Bank Loan. Present a detailed Business Plan and offer collateral. For new Seartups, TC is a definite long-shot, which is why it’s all the way down near the bottom of the list. Still, keep it in mind as a possibility.
This is another path to funding that’s difficult if you’re a Startup without an established reputation, but if you have the right kind of product or serve & great Marketing skills, you just might be able to pull it off. If people like you enough, you might convince enough of them to pre-pay for the right to download the finished product on Launch day. This way, there’s no middle-man involved, which is giving you direct access to the capital you need. It’s so cray-z, that it just might work.
23) PayPal Loan
You might not realize that PayPal offers Loans, but yes, they do. PayPal Working Capital offers short-term business Loans based on an existing business’s PayPal earnings. In short, it’s a funding option that requires a bit of business history. It’s not for the brand-new Startup with no earnings, but for older Startups with some income, PayPal Loans can be an attractive option.
Final Thoughts on Startup Funding
The quest for Startup financing isn’t a game for the meek. It’s a full-contact sport, where you’ve got to be willing to get out there and fight for the merits of your ideas & the Opportunity presented in your business plan. You’ve also got to expect significant rejection when seeking Business Capital. That’s why it helps to be aware of these many paths to capital as possible. Given the abundance of funding opportunities out there, the odds are reasonable that you’ll find at least one path that’s navigable for you and your Startup – so long as you’ve done your homework and applied a fresh coat of optimism to your opportunity. Of course, you could have avoided all this if you had just chosen to be born with a Trust Fund, but that would have taken the challenge out of it and you know we Entrepreneurs live for & love challenge !!!
Comments: Do you know any other ways to find Funding for your Startup?
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