Are you in the process of starting a new business? It’s an exciting venture; from choosing an office or storefront to constructing a five-year plan, business ownership can be remarkably rewarding.
However, to reap those rewards more effectively, you’ll need adequate startup funds to hit the ground running. Most people don’t have that kind of cash readily available, so they search for lenders or start crowdfunding.
All funding solutions for new businesses have their own benefits and drawbacks. In order to select the best business funding solution for you, you’ll need to know your options—and what each one can do for your business.
Think About Your Needs
Before you apply for a small business loan or start a crowdfunding campaign, determine how much money you need and why you need it. When you start the loan application process, your lender will want to know where the money is going.
Construct a solid, detailed business plan. Describe your business’s goals for the next several years. What stage is your business in right now? Are you brand new or have you been operating for a few months?
Ideally, most lenders like to give loans to business owners who have been in operation for at least a little while. They’ll be able to see what you do for the community and how a loan could help you grow. Plus, if you start your business now, you’ll be able to identify potential growth areas more quickly.
Many new business owners seek out funding solutions to help them pay for the following elements:
- Hiring new employees
- Renting out an office or storefront
- Purchasing new equipment
- Setting up payroll
- Buying inventory
Do you need financial help in any of these areas? Congratulations: you’ve identified a need within your business that needs additional funding. Now where will you look for that funding?
Compare Your Funding Options
Now that you have an idea of how much money you need and why you need it, it’s time to look for potential sources of funding. Luckily, there are plenty of lending institutions and individuals out there who are willing to invest in new businesses. Let’s look at some of the most popular options.
Small Business Loans
The Small Business Administration (SBA) exists to help connect small business owners with potential lenders who want to see them succeed. SBA loans are popular due to their long repayment terms and relatively low interest rates.
To reap those benefits, however, you’re going to need a solid credit score. Make sure you pay off your other debts promptly to prove to your lender that you’ll pay them back with similar alacrity.
Venture Capital Firms
Venture capital, or VC, comes from firms (or occasionally individuals) who back small businesses in exchange for partial ownership of the company. If you’re interested in partnering with a VC firm, practice your elevator pitch and network regularly with other business leaders in your niche.
Some small business owners may balk at the idea of having to share ownership of their company, but venture capitalists want to see you succeed. They’ll lend you the startup funds you need and provide a voice of experience on your board of trustees.
If you have a large network of friends and family who are interested in your business, why not let them contribute? Set up a Kickstarter or GoFundMe for your business. Crowdfunding isn’t like venture capital; you’re not selling pieces of your company. Your loved ones who chip in to help won’t have control over your business.
To incentivize your network to help fund your business, offer them perks like t-shirts or coupons for helping you secure crucial business funding.
An angel investor is similar to a venture capitalist, but instead of working with a firm, they operate as an individual. Angel investors typically have a very high net worth and will provide valuable funding and financial insight in the early years of your business.
These folks do often ask for part ownership of the company, or at least a hand in major decision-making, in exchange for their startup funding.
If you’re not interested in selling pieces of your company for new business startup funding, take stock of your own finances. You could have the money you need to get off the ground hiding in your retirement plan.
Financing your new business with your existing 401(k) is an increasingly popular option these days. The process utilizes a ROBS, or Rollover for Business Startups, to transfer the funds. You’ll register your new business as a C corporation and create a 401(k) program in its name. Then, to avoid excessive withdrawal fees and tax penalties, you’ll roll the funds from your old 401(k) into the new one. Voila—your new business has plenty of funds in its name!
Business Line of Credit
For a more flexible loan, sign up for a business credit card. It works much like a regular credit card and can be connected to your business’s checking account. That way, you can pay off debts promptly and easily.
With a business line of credit, you only pay interest on the amount of money you borrowed. When you pay off that amount, the funds available to you are replenished.
Prepare To Secure Funding
Now that you know more about the options available to you, get ready to make that elevator pitch or fill out that loan application. As mentioned before, you’ll need to keep an eye on your personal credit score.
Having a credit card in your business’s name is a good idea, as it establishes a credit score for your business—that number will be useful when asking for loans. It proves how conscientious you are about paying off debt!
Take the steps necessary to secure your preferred method of funding. If you want to use your 401(k), talk to a financial advisor about the specifics of how a ROBS works. If you’re seeking venture capital, go to networking meetings regularly and learn to pitch your business in 30 seconds or less.
No matter which business funding solution you’ve selected, make sure it’s the best option for your business’s needs. Only ask for an amount you know you can pay back, and be sure to present yourself as a savvy, ambitious business owner with an eye for growth.