Many new entrepreneurs start their businesses with funds from their own personal savings, or by getting friends and family to help them get off the ground. But that’s not an option for everyone. What do you do then?
Your first inclination is probably to try to get a bank loan. But it can be very difficult for a brand new business to get a small business loan from a bank. Traditional lenders often require at least two years’ time in business, and steady or growing revenues for that time period. Good credit scores (personal and/or business) are also often a must. Without a solid history of sales, it can be challenging to get lenders to take a chance on your startup.
Some banks and credit unions will finance startups, and some even offer SBA loans to new businesses, but generally when they do make those loans, they go to founders who already have extensive business experience, or experience in their specific field (such as a veterinarian opening a new practice).
That doesn’t mean you’re out of luck if you’re looking for startup capital.
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Here are five financing options for novice entrepreneurs to consider when looking for startup capital:
- Credit cards
After personal savings, friends and family, credit cards are one of the most popular sources of capital for young businesses. Why? Because most card issuers (even those that issue small business credit cards) will consider income from all sources (not just business income) and make decisions largely based on that income along with the owner’s personal credit scores.
The ideal time to get a small business credit card can be when you still have a day job providing income you can list on the application. But if you’re already out on your own, you may list other income available to pay the debt, including income from a spouse or partner who will pay the bills if your business cannot.
A couple of credit cards with generous credit limits can rival the amount of financing you’d get from a bank line of credit. Pay close attention to interest rates, though, and take advantage of low-rate offers if you’re going to carry a balance. And of course, watch your spending like a hawk so you don’t wind up with debt you can’t repay.
- Trade credit
Trade credit, or credit from suppliers or vendors, should be on every serious entrepreneur’s radar. Getting credit on net terms, such as net 30 (meaning payment is due 30 days from the invoice date) can be a great way to not only improve cash flow, but also builds business credit.
Vendors that report to business credit agencies can provide a big boost to your business credit scores. Most vendors don’t charge interest, but you may give up a discount for prompt cash payments.
- Equipment leasing
Don’t assume you have to fork over cash to buy the equipment your business will need when you’re starting out. You may be able to lease it, instead. Everything from IT equipment to trucks may be leased.
There are a variety of different types of leases, but a couple of the most popular are:
- An operating lease (or “fair market” lease), where you lease the item for a period of time and then either purchase it for its fair market value, upgrade to new equipment or return the equipment.
- A capital lease (or “$1 buyout” lease) where you own the equipment but make payments for the term of the lease. At the end of the lease you can purchase it for a nominal sum, often $1. This type of leasing may offer tax advantages, so it’s worth discussing with your accountant.
Some equipment sellers offer leases to buyers or partner with companies that do. In other cases, you will work with an equipment leasing broker to find the best lease for your situation and qualifications.
Crowdfunding involves raising money from people you know as well as those you don’t, typically through an online platform.
There are four main types of crowdfunding:
- Rewards: If you’re offering a product or service, you may be able to get people to buy into your product by offering them an early version of your product or another reward (such as merch).
- Equity: Raise up to $1.07 million by selling shares in your company via Regulation Crowdfunding. (Note that some offerings involve convertible notes or debt instead of shares).
- Debt: Borrow money that you will pay back. For larger loans, you may need to go the Regulation Crowdfunding route. But if you just need a small amount to get started, consider a platform like Kiva, where you can raise up to $15,000 in the U.S. at zero percent interest. Your initial backers will likely be friends and family, but after that, your campaign can appear to the entire platform of 1.6 million lenders who lend through this non-profit simply because they want to help small businesses succeed.
- Donor: Popularized by GoFundMe, this fundraising method involves getting donations from individuals who don’t expect to be paid back. While donor-based crowdfunding has helped many businesses during the pandemic, it’s not as popular as a source of startup funding. Still, if you have a compelling case for using donor crowdfunding to get your business off the ground, you may consider this option.
Regardless of which type of crowdfunding you choose, you’ll likely need to get your campaign started by first getting people you know to pitch in. That means you’ll need a way to reach prospective backers, whether that’s by email or on social media. A solid marketing campaign is a must. Check out this helpful webinar about crowdfunding from SCORE.org.
- Retirement funding
You can withdraw funds from retirement accounts to start a business, but make sure you understand whether you’ll need to pay taxes on that money, as well as any penalties for early withdrawals that may apply.
Another option is the Rollover for Business Startup (ROBS). With one of these programs, you use retirement funds in a specific way to pay for startup business costs. It can be popular with business owners going into capital intensive or high-risk businesses where they can’t secure other financing. But be careful: the IRS has very specific rules for those who use these plans, and if you run afoul of them you may have to pay taxes and penalties.