Starting a new business is a scary proposition. Not only it requires startup funding: it’s stressful, time-consuming—and more fail than succeed. Around 50% of new businesses fold after five years, and only one-third still exist 10 years after launch, according to Money Crashers.
During the first few years of a company, the goal is to reach financial stability. But launching a business can cost a lot of money: the costs for starting a business can range from $2,000-$5,000 for smaller businesses, according to the Small Business Administration, and could even reach as high $30,000 for some, according to the Ewing Marion Kauffmann Foundation.
Fortunately, there are plenty of options to secure money for your business that can make financial sense for your circumstances.
Best Options to Get Startup Funding
Use Personal Savings
While using your own money to launch your business is not without risk, it remains the simplest option. There are no terms and conditions you need to agree to. You don’t have interests you need to pay back. You’re not beholden to anybody else but yourself. So if you’ve been saving up to start your own business and you have the money to do so without compromising your ability to pay rent or other necessary expenses, using your personal savings could be the right course of action for you.
Sell Personal Assets
Maybe you don’t have money available right now to start your business, but you have some valuable assets, like cars or real estate, that you don’t necessarily need. You can sell those things and use the money to launch your business.
Borrow Against Your Home
If you’ve struggled to find a small business loan with a reasonable interest rate and that accepts borrowers who are launching a business, you can consider a home-secured loan. By staking a valuable piece of collateral to the terms and conditions of the loan, you will likely be able to borrow the money you need with a more manageable interest rate and repayment policy.
Borrow from Friends and Family
It might be uncomfortable to ask for money from people you know, but friends and family are likely to be more generous about lending you money than strangers at a bank. If your friends and family can afford to invest in your business and are willing to take on the risk, this option has proven successful for many new business owners. Bringing money and business into a personal relationship can cause complications and tension, but if you’re prepared to handle that, this might be the best way to get money for your business venture. Read more about borrowing from friends and family.
Use the Funds from Your Retirement Account
It’s fairly common practice to draw funds from a retirement savings account to bolster a new business. This option certainly carries risk. There could be fees involved from withdrawing money from these accounts, and depleting your post-retirement income when you don’t know what complications you’ll face later in life might not be wise. But there are smart ways to go about it, so it’s an option that you should likely consider. Read more about how to use your 401(k) to finance your business.
Use Credit Cards
If you have a low-interest rate credit card and high credit limits, you could make the purchases you need to start your business on your credit card. This is often a less complicated option than taking out a loan, but you don’t want to get into a situation where you can’t make the minimum credit card payments and incur late fees that compromise your ability to continue to fund your business. Read more about when to use credit cards for business purposes.
Apply for a Grant
Depending on the nature of your business, there could be an organization or philanthropic individual that would want to give you money so your business can grow and thrive. There are plenty of grants available for particular kinds of businesses, so do your research to see if yours would be eligible for any. The amount of money varies from grant to grant, so you could even apply for multiple from different entities.
Take Out a Personal Loan
You could obtain a personal loan and use the money to help start your business. There are plenty of banks and lenders that offer reasonable interest rates for all kinds of businesses. In particular, Aura is an online lender with flexible terms that could interest you.
Take Out an SBA Loan
The Small Business Administration is a government agency that offers loans to small businesses. While the terms and conditions are likely to be friendlier and more forgiving than what you might get from a bank or a traditional lender, the eligibility requirements are rather strict, and it can take a while to get approved for the loan. Learn more about SBA loans.
Turn to Venture Capital or Angel Investors
Venture capital firms and angel investors are always looking for the next startup or small business to invest in. Venture capitalists are entities that use funds from other people to make investments in businesses, where angel investors are often individuals who feel a passion or connection to the businesses where they place their own money. Both could be good options for your business and a reliable source of capital.
Turn to Crowdfunding
With the rise of the internet and the numerous platforms to raise money online, crowdfunding is becoming an increasingly popular way for new businesses to raise capital. If your business concept is of interest to a large group of people, you could use crowdfunding to receive donations from individuals, from small amounts to large sums. Learn more about crowdfunding.
Consider a Business Incubator
Business incubators make a living helping small and struggling new businesses. They might not offer you money to use for any purpose, but they can help you secure office space or train you in particular skills that you’ll need to operate your business effectively. With the backing of a business incubator, you might lower the funds you need to launch your business, making it easier to find investors or secure a loan.
When looking to bring in capital for your new business, there are always alternatives to taking out a business loan. Be mindful that taking a loan during the early stages of your business could force your finances and be counterproductive. Moreover, most business lenders require at least two years in operations to grant you a loan. Some alternative lenders like Camino Financial are more flexible: you just need 9 months managing your business to apply for a loan. If t you have been already managing your business during that period of time, now it could be the right time to apply for a loan with Camino Financial. In any case, make sure you weigh all your options during the early stages of your business and pursue numerous paths simultaneously to give your company the best chance of success.
Now that you know the possible options to get startup funding, it’s time to start planning. Below you have 6 tangible steps you can take to get startup capital.
6 Steps to Get Startup Funding for Your New Business
Step 1: Get Your Paperwork in Order
It is going to be difficult to get startup funding and capital if your business is not legally formed. If you have questions about the proper legal formation, check this post where you can see the different types of legal formations. Also, apply for an Employer Identification Number for tax and other business-related purposes.
Step 2: Go See Your Banker
Don’t have a banker? To set in motion the process of getting startup funding, I highly recommend working with a community bank, which is likely to be much more small business-friendly than a national bank. A bank will likely not give you a loan today but may lend to your business in the future. Develop a rapport with a banker, look into their business credit cards, and open a business checking account.
Step 3: Analyze the Numbers
Your financial records will be requested when you apply for a loan to access startup funding. So whether you are barely starting a business or generating modest revenue, measure the performance of your business and set performance goals. Be sure to identify your business cash needs over the course of the next 12 months. Last but not least, make sure you establish reporting systems to track performance (e.g., QuickBooks, Xero). We highly recommend this post on how to make a budget for your small business.
Step 4: Type Cast Your Business
Depending on the growth profile of your business, your capital options may be significantly different. At the expense of overgeneralizing, I’ve narrowed 4 types of businesses, and your business should likely fall into one bucket (only one):
- Young Small Business, like a one unit restaurant, retailer or beauty salon
- Fast Growing Startup, like Uber 5 years ago
- Product Launch, like the product-oriented businesses, featured on “Shark Tank” (e.g., PipCorn)
- Solopreneur, loan-wolf seeking the dream either in accounting, bookkeeping, legal advisory or something else amazing
At the time of applying for a loan, your startup funding options will differ depending on the category your business falls into.
Step 5: Assess Your Funding Options
Once you have determined the type of business you are in, identify the capital options best suited for your business. Simply study carefully the options we offered you in the first section of this post. Be mindful also of the time you’ve been in business. Finally, it’s advisable to consider several alternatives simultaneously instead of restricting yourself to one single option.