How to finance a startup small business ?

How to finance a startup small business ?

When launching a business, the essential components of your success are the quality of your ideas and your willingness to put in the work required to see those ideas come to life. In the milk of capitalist meritocracy, 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 money 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.

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 fever 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) Use Personal Savings

Self-funding may not be realistic for many entrepreneurs. Yet the fact remains that according to the nonprofit association SCORE, 78% of startup business owners didn’t seek startup financing outside of personal savings or job income in their first year.

You might not be flush with cash, but you can always try doing things to change that. You could sell your car and use the bus to get around. Sell your house and rent an apartment above a restaurant. Or keep the house and get a home equity loan or line of credit. Just be sure to make the payments, or else you’ll be wishing you got that apartment when you had the chance.

2) Tap Into 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. But if you were looking for a life of minimized risk, you’d have chosen a more staid 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). For a 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) Ask Friends and Family

Another solution is to hit up your friends and family for money.

However, it’s one thing to imperil 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 friends and family, 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.

4) Get 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 “chicken and egg” problem. Situations like these are where personal loans can become a solution.

While getting a business loan is often dependent on characteristics like the health and creditworthiness of your business, 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, and 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 business 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.

If you think a personal loan might be just the ticket for your business startup, check out our guide to getting a personal loan for business.

5) Use Credit Cards

Credit cards can always help you out of a jam in your personal life. The same applies to financing your startup.

Small business credit cards 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 poobah, credit cards may be one of the most convenient means of financing a budding business.

Of course, the convenience of credit cards are balanced out by high interest rates. You don’t want to let your credit card debt linger with the interest piling up, so plan to pay it back as soon as possible, within the no-interest grace period if possible.

6) Apply For Grants

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 and local government 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, and other groups.

Be prepared to write an extensive and 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 hundred 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.

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