Financing your startup: from loans and self-financing to crowdfunding
Launching a company can be exciting and enticing, yet money remains the main issue. Getting the initial capital is a challenge, and sometimes the reason most potential entrepreneurs are just dreamers. There are many financing ideas, and it is never a good idea to rely entirely on a single source. As in the case of an investment portfolio, diversity is critical. We advise you to combine two more of the following financing sources to get all the money you need and even reserve for circulating capital. Here are 15 ideas ranging from self-financing to relying on the government.
If you are just starting and your business idea doesn’t require substantial funding, and you will be the only employee, you could start with your own money, at least in the beginning. This approach takes some of the pressure of reaching some targets as imposed by investors or required by government programs. Some of the potential ideas include using your savings, taking different kinds of loans, digging into your retirement funds, or getting some immediate value from your life insurance.
If you had had it with the corporate world and already have some dough set aside from your six-figure days, it is a great start. Self-financing remains the first choice of creating a startup and also serves as an essential contribution, even in a mix of funding options. Other investors use this factor to assess if you believe in your idea and put your money where your mouth is. Having no initial contribution might act as a negative recommendation, speaking about your money management skills.
Personal loans (microloans)
If you have been diligent with your money so far and have an excellent credit score, getting a loan is not only easy but also a great business decision. Considering that some loans can have an APR as low as 5% and that you can use that money to get ROI of 20-30%, that leaves a consistent profit margin.
However, if you are on the higher end of the APR range, going towards 29.99%, you should reconsider your options. A rule of thumb is that your APR should fit a couple of times into your ROI, or your business is heading towards bankruptcy fasts.
Credit card loan
Depending on the amount you are looking to get, you might get away with less than a personal loan. If you only need under $5000, maxing out your credit card could give you fast access to that money. Yet, if you choose this solution, be careful with the APR, as most are within the 12-15% range, making this a relatively expensive way to get money. The good news is that you can sign up for a new credit card and, at least for the first year, get 0% APR as an introductory bonus. This solution is also low pressure since you can just repay the minimum amount and keep money flowing in more lucrative directions.
If you are already unemployed and have some resources in a 401(k) from your previous job, you could do some legal tricks to get that money rolling into your own company. The legal way to do it is to create a C corporation (regular) created but not issued stock. Through the new organization, you adopt a retirement plan and move your funds into this new account. You can even get funds from your spouse or friends if they join the startup as employees. Now it is time to issue the stock and create a profit-sharing plan in exchange for cash.
Not only 401(k) offers you the advantage of using your retirement savings to start a company. A legal loophole allows you to do the same with an IRA. The government will enable you to withdraw funds for 60 days, as long as you put them back. This could be a way of covering other pressing expenses. If you are sure that you will get your money back from accounts receivables, this is an easy scheme to try. You could also consider checking out the Personal Capital reviews at aaacreditguide.com to see if they are a good fit, as the fees could be lower. Unfortunately, if you are late, the legal consequences could be a 10% early withdrawal fee and taxes on the money you used as income.
Life insurance equity
A more convenient way to get some cash is to leverage the capital you have already accumulated on your life policy, if any. This could give you much better rates than a loan or a credit card, but you also risk losing the savings if you don’t make the repayments. If you die before the debt has been fully paid, the remaining amount is subtracted from the money your beneficiary would get.
One of the riskiest ways to get the money you need is to get a second mortgage on the home equity you have already paid. Although you can get a substantial amount of money, you put your home on the line for your business. Of course, this is a way to impress other investors. It could be a great starting point if you also want to attract an angel investor to prove that you are serious about your decisions, and you are ready to put everything on the line. For seniors 62 years and older, one way of tapping into their home’s equity is by getting a reverse mortgage. A good thing about this kind of mortgage is that you can custom fit it to meet the purpose, whether it’s for funding your startup or for your retirement funds. If you’re considering a reverse mortgage, do your research to find the best reverse mortgage lender for your specific needs and situation.
There are dedicated peer-to-peer lending platforms where you can get a loan at a rate you both agree, but you can definitely take this concept further. Using a bit of research and networking, you can find funding by looking at more non-conventional money sources.
Traditional peer-to-peer solutions could be a great idea, too, especially if you are part of minority groups or ethnic groups. It always helps to have a mentor that can recommend you to the right people and act as a trustful introduction.
Friends and family
Starting a company with “love money,” as they are called, is the second most common option after self-funding. It is easy money since they already believe in you, and most likely, they will charge nowhere near a bank as interest. The close relationship should not exclude a written agreement with clear terms and the opportunity to offer them equity in the newly founded company. Yet, be careful who you bring on board and to whom you give decision power to the company’s board. If your family and friends will have a saying in the startup, it’s a good idea to be sure they are well-versed in business. Otherwise, just find a way to compensate them and go on your own.
The Internet has given people tremendous power, including financially. You can now get millions of people from worldwide to pledge money for your business idea and make it come to life. Not only can charities benefit from this, but many innovative gadgets, games, or tools have also come to life through the power of the people who wanted them. Furthermore, this is a great way to get your startup off the ground since you secure the money and an initial client base and their support. Not all companies can benefit from this approach; it needs to be something less ordinary, making people feel excited.
You might have the luck to start something that could catch the eye of an established business person who will be willing to invest in your company. Most of the time, this is more emotional than a business decision, so here are a few tips and tricks to help you secure such protection.
Choose a business that you like, which represents you and about which you can talk passionately for hours, not just the latest trends. Prepare in detail to impress your potential investor and maybe try to find something they will like personally.
After you have secured the deal, be accountable, and keep in touch with your investor. It is always a good idea to let them know how business is going if you have encountered any obstacles or just need advice.
Suppose your idea is large enough to require substantial financing, and your resources or those from the already mentioned sources don’t cover the estimated budget. In that case, it could be a great idea to access institutional money, which is consistently more significant and requires more caution, planning, and warranties.
The options include venture capitalists who are ready to give you the funds in return for some shares in the newly founded company, special government funds for startups, or even factoring your future earnings in return for cash now.
Like crowdfunding, this option is not for any kind of business. Most venture capitalists are looking for tech, fintech, or biotech startups, and they are looking for exponential growth. If your business proposition comes with an ROI of 3x or 4x the initial amount, they might be interested.
Be ready to sell your soul in this care as all venture capitalists ask for an essential package of your shares and significant decision power in the company. If you are a new entrepreneur, this is not necessarily bad, since they can bring management and risk hedging experience. A venture capitalist is a trustworthy shark. They will push your limits, but they have every intention to help you succeed since that means getting their money back with a profit fast.
Most banks can be reluctant to work with newly established companies with no substantial track record of success. Luckily, special programs help you get your idea off the ground, such as the US Small Business Administration (SBA). They offer dedicated loans for specific categories like agriculture or equipment. It’s an excellent opportunity for entrepreneurs belonging to minorities, ethnic groups, or women, as there are dedicated programs with generous funding.
The downside of this approach is that being a highly regulated process, it can mean a lot of paperwork, longer approval terms, and sometimes even bringing a consistent part of the necessary money from other sources. Expect to be asked for a detailed budget plan, project impact analysis, feasibility studies, and more.
These are not necessarily ways to get money but to save some instead. By allowing you to use their premises, equipment, and know-how, the incubators help startups focus on their core competencies and develop the product faster. Now worrying about rent or payroll frees up some essential hours which can be reinvested into crafting or testing the product. Most incubators allow new residents to join them for no longer than two years. That is enough time to launch your business and make valuable connections among the other entrepreneurs, even start side businesses.
If your idea sounds too good to be true and your price is just right, you might get a client ready to pay for your products before you create them. This idea works, especially if your product is customized and would have no value in the stock. This is not a way to start your business, but to get enough money for running capital.
Factoring accounts receivables
If you expect specific amounts to be paid to you in 30-90 days, you can get that money right away to continue your production cycle. The receivables are not due yet are transferred to your providers to keep an ambitious scale-up plan.
If you still think that getting the money to start a business is the main issue, you are just looking for excuses. Of course, there is no free lunch, and you are expected to work hard for them and perform your due diligence regarding the best mix for your particular case. Yet, there are numerous ways to get both the initial capital and funds to run your business, as long as you are open-minded and dedicated to fulfilling your dream.