Most small business owners run into cash flow issues at some point in their entrepreneurial journey. It’s a valid source of concern. Cash flow and lack of funding are primary reasons small businesses fail. And it may be the leading cause of your entrepreneurial angst.
If you’re a first-time entrepreneur, some of the most recommended ways to fund your startup aren’t doable yet, especially if you haven’t built a solid business credit profile. But never fear, there are ways you can get the cash flow you need to turn your dreams of owning a business into reality. Here are five to start with:
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Startup loans
A startup loan is specifically designed to cover the startup costs of your new business. You can use the funds toward things like working capital, supplies, inventory or furniture for your office, as well as equipment purchases or to buy real estate for your company.
Startup loans can be challenging to source, but they’re out there. Two excellent sources are Accion and the Small Business Administration (SBA).
Accion is a non-profit organization that gives people the financial tools they need to improve their lives. And that includes small business startup loans! This is one of the few lenders that will give you funding before you’ve actually launched your venture.
Accion’s exact qualification requirements vary depending on your location. But, you must be current on all of your bills and other debts. You should have no bankruptcies in the past year and no unpaid tax liens. You’ll also need a provable source of income to show you can pay back the loan.
Typically, you need to be in business for two years before you can qualify for an SBA loan. But the Small Business Administration offers two options for budding entrepreneurs: a microloan program and Community Advantage Loans. To clarify, the SBA doesn’t make loans, they guarantee them. So, the SBA approved lender you choose will have individual qualification requirements.
- Microloans: The SBA’s microloan program offers loans up to $50,000, but they say the average loan is $13,000. To find out if your business qualifies, find a microlender in your area to discuss what you need to qualify.
- Community Advantage Loans: An SBA Community Advantage Loan is a federally guaranteed term loan. The program, launched in 2011, was designed to provide underserved communities with better access to funding. The exact requirements depend on the lender you choose to work with. You’ll need to show you’re a responsible borrower and your business idea is viable. But you won’t have to worry about collateral or an impressive balance sheet.
Related: This Entrepreneur Financed Her Business With a Side Hustle
Business credit cards
Business credit cards can be an effective financing strategy if you use them wisely. You can use them for everyday purchases you’re likely to make anyway, such as office supplies. You can also use them for advertising and other business expenses. That way, you’ll keep your cash flow available for expenses you can’t pay with a card, like your payroll.
Business credit cards make sense if you qualify for a low introductory rate. A credit card with an interest rate of 16 to 18 percent may be less expensive than other small business financing options, but keep in mind, they frequently carry much higher rates.
Another advantage of business credit cards is the fraud protection they provide. The debit card attached to your business checking has limited fraud protection. Your business credit cards will cover you if someone uses your card without your consent.
To qualify, you’ll need your consumer credit score to be in the mid-600s or above. It’s likely you’ll be asked to sign a personal guarantee. A personal guarantee is when your social security number is required along with your business information. Small business credit card issuers will also take a look at all of your sources of income to ensure you can pay your bills.
Crowdfunding
No doubt you’ve heard of crowdfunding. It’s a popular source of funding for many hopeful entrepreneurs, but it can be disheartening to launch a crowdfunding campaign, only to have it limp along with just a few donors.
Final Straw is a startup that manufactures a collapsible, reusable straw. CEO, Emma Cohen, used Kickstarter to fund the company’s initial costs. She and her team raised $10,000 on the first day of their campaign and ultimately raised almost two million dollars.
Are you wondering how they did it? Cohen says in order to succeed, you need an outstanding product or idea. But she contributes most of Final Straw’s success to the plethora of work they did beforehand.
Cohen says to spend a significant amount of time building an audience, brand supporters and fans. She also says to build your email list before you even launch your crowdfunding campaign. That way, you’ll have a list of individuals who have an interest in your product and want to help you succeed.
Once you have your loyal fan base, choose the platform that fits best with your idea. You should also read the fine print regarding the costs associated with each platform and how and when you’re allowed to withdraw your funds.
Here’s the difference between a few of the major platforms:
- Kickstarter: Kickstarter is a rewards-based platform whose mission is to bring creative projects to life. Your project or product must be something you can share with others. You’ll set a funding goal, which is the amount of money you need to complete your project. Then, you get backers for your project. It’s an all-or-nothing platform, meaning you have to hit your goal in order to collect the money your backers have pledged. If you hit your goal and collect the funds, you then share your goods with your backers in return.
- GoFundMe: GoFundMe is a donation-based platform that’s used for personal and business funding needs. You’ll see everything from product launches to personal emergency crusades. With GoFundMe, you set a goal and individuals donate money to help you reach it. You can withdraw the funds as soon as they’re donated, or wait and withdraw them all at once after the campaign ends.
- Kiva: Kiva is a crowd-sourced loan program. The loans are considered microloans and they do need to be paid back. With Kiva, you’ll apply for a loan and go through the approval and underwriting process. If your idea is approved, Kiva will post it to the platform for individual lenders to support. Lenders loan in increments of $25.00 or more. But you have to meet your loan amount in a certain period of time or you leave with nothing. Kiva maintains control over funds dispersal.
Friends and family
Asking friends and family to invest in your startup is a sure-fire way to access capital, but you may be hesitant. It can be uncomfortable to ask for money, and you may be concerned about putting your relationships in jeopardy.
Approach your close relationships the same way you would an investor. In other words, be professional. Set a meeting, have a copy of your solid business plan and current financials and pitch your idea. Offer shares in your company or a return on their investment.
It’ll be easier on your friends, family and you if you ask multiple people for a small amount. It’s easier for them to say yes to a smaller number, and it minimizes their risk.
Using your 401(k)
Did you know you can use your 401(k) to fund your startup? Of course, you’ll want to analyze the risks. But if your business idea and plan are solid, and you decide it’s the right option for you, there are three ways you can use your 401(k) to fund your business.
Rollover for Business Startups (ROBS)
If you plan on working for your business full time and have $50,000 or more in your 401(k) or traditional IRA, ROBS is an option. It’s a complex transaction, so you may want to use a ROBS provider to help you navigate the waters. But do your research first; you shouldn’t have to pay a small fortune for their help.
With the ROBS structure, you incorporate your new business and open a new 401(k) under it. Then you roll over your current pre-tax IRA or 401(k). The advantage is, it’s tax-free and you can use all of your retirement, but experts warn against it. The disadvantage is, it puts you on the IRS’ radar even though it’s legal and based on a provision in the Internal Revenue Code (IRC 4975(d)(13).
Since ROBS isn’t a loan, you won’t need to qualify. But there are a few requirements:
- You’ll need to register your business as a C-corp
- You’ll need to be an employee of the company
- You must have a 401(k) or traditional IRA. Roth IRAs aren’t eligible.
Cash-out
You can take all or some of the funds in your 401(k) to start your business. But, if you’re under 59.5-years-old, you’ll pay income tax and a 10 percent fee. So cashing out your 401(k) should be the last financing option you turn to.
If you decide to use your 401(k), IRA or Roth IRA, your provider will give you the paperwork to get the ball rolling. It’s a complex transaction, so you may want to get help from a tax professional.
401(k) loan option
Your third option for using your retirement to launch your new venture is to borrow from your 401(k) or IRA. The main advantage of borrowing versus the cash-out option is you won’t have to pay taxes. You can borrow up to $50,000.
You’ll have five years to pay back the loan, and you’ll pay prime interest.
Keep in mind, you can use some of your retirement funds as a downpayment to qualify for another loan product. That way, you don’t risk the bulk of your retirement.
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Your takeaways
Entrepreneurship can be fraught with challenges and financing your business may be one of them. But, if you believe in your business concept, don’t give up. The rewards of business ownership can be significant.
If you’re short on cash flow, try one or all five of these funding options to see which of them works best for your unique needs. But, the information in this article is an overview, so do some additional research on each of these options before committing to one. Make sure you understand the pros and cons of each.
Be patient and you’ll find the funding solution that’s perfect for you!
