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When it comes to financing, small businesses nowadays solely rely on out-of-the-box ideas and financial creativity.
Traditionally, small businesses have always been a key driver for promoting economic recovery.
However, like all other businesses, the owner must strive to maintain its growth even in the midst of a rough patch.
Funding your small business will depend on essential factors such as what level you are in your business, the exact amount of start-up funds, and the type of funding.
If you’re planning on how to fund your business, it’s best you go about it with all the seriousness and creativity it deserves.
It’s never a simple task to finance any economic climate.
Given your current financial status quo, securing capital to either kickstart or boost your business may be something that’s next to impossible.
For that reason, this blog covers a list of creative and practical ideas to fund your small business. There’s more than one option in all business-related ventures.
In most of the techniques outlined below, you may notice that debt and equity are two of the most prevalent items.
Here are 7 practical tips to get you going:
1. Tap Into Your 401 (k)
This is the most viable solution if you’ve never been lucky in getting a bank loan – or any loan for that matter – to start your own business.
Lucky for you, the tax code has the appropriate provisions for you to use your 401 (k) without incurring any penalties on your end.
Using your retirement savings to fund your business is as simple as it gets. Legally though, you may encounter a few hurdles here and there.
Your first step will be to develop a C corporation that has already been created but is yet to issue stock. The corporation will then come up with your retirement plan.
Basically, what you’re after is an equal profit-sharing plan that enables you to invest 100 percent of your rollover assets in employer stock.
Source your retirement funds from your IRA, former employer or those supporting your new business and deposit it into your 401 (k) plan. This will go a long way in limiting your risk.
Next, the corporation will issue its entire stock and make a transfer to your profit-sharing plan. In exchange, they’ll take up the cash in your plan which will be used in pursuing new business opportunities.
As complicated as it may seem, there are companies that are solely dedicated to assisting you in wading through the entire process.
It’s worth noting that financing your start-up using your 401 (k) has its fair share of risks. For instance, if your business comes to a standstill for some reason, you will have lost a significant share of your retirement money.
That’s why this technique is not for the no-risk-takers or those with zero business experience. Take your time and know all there is to know about it before making the huge leap to fund your small business using your 401(k).
2. Ever Heard of Factoring?
Most businesses use the factoring to get started on their businesses. Individuals and companies that use factoring get money relatively quicker than other start-ups. So, what is factoring?
Factoring is the simple process by which a company puts its receivables up for sale at a specified discount for up-front cash. As much as it gets you quick cash, it can also drain you financially.
Firms that sell their receivables mostly pay a certain fee that’s something next to the full amount. If you were to pay a two percent fee to get funds one month in advance, that would be equivalent to a 24 percent annual interest rate.
Three parties are involved in the factoring process: the seller, the receivable, and the third party. The seller (you) sells the receivable.
The receivable, which is the asset, is used as collateral due to the fact that it’s the amount that’s owed to the seller.
The third party may either be an individual or organization that’s interested in purchasing the receivable at a discounted price in cash.
The account receivables are considered an asset to the business. Considering they’re sold at a discounted price, the third party will only offer cash payments if they’re assured of a hefty profit.
Factoring operates in similar ways to a loan, but it should never be mistaken for one. It lies in the same class of financial plans such as invoice discounting and forfeiting.
All these enable a start-up business to raise the much-needed funds. What’s more, with factoring, you have to sell something (receivables) to make something.
When you factor your assets, you have the advantage of making fast cash, securing all debts that your business may incur in the long run, reduce the risk of debt and best of all, ensure favorable cash flow.
3. Crowdfunding Is An Engaging and Effective Option
You have a huge opportunity as a small business owner to raise funds through crowdfunding. There are four kinds of crowdfunding:
This is the least complicated type of crowdfunding. Donation-based crowdfunding is where people donate funds to a charity, cause or individual without expecting them to repay them later.
This type of crowdfunding is best for businesses that find it hard to get financial support from their communities to fund their campaigns.
Otherwise known as seed crowdfunding, this small-business financing option involves the solicitation of funds from individuals by entrepreneurs.
This is where business owners pitch their fundraising goals and business ideas on a crowdfunding platform. For everyone who donates, you’ll be required to reward them with cash, gift cards, or even a thank-you note.
It encompasses other forms of crowd-based lending including peer-to-peer (P2P)
Lending, invoice financing, and mini-bonds. Debt-based crowdfunding involves the lending of money to an individual or business via a platform.
By getting rid of the typical middlemen involved in bank transactions, you’ll keep your costs down for borrowers while simultaneously giving lenders improved return rates.
Equity mostly comes about when bonds, shares or stocks are involved. In terms of crowdfunding, businesses sell a share of their company’s assets to investors.
Equity crowdfunding is mostly best for businesses that have the potential to grow and scale fast.
This type of crowdfunding got its start much later compared to rewards crowdfunding considering it wasn’t legal until about three years ago.
For each of these types of crowdfunding, there are a couple of related websites that provide higher potential and exposure for funding. This will be covered in the next point:
4. Find the Perfect Crowdfunding Site
Most, if not all, crowdfunding sites offer competitive rates to a wide range of start-up business loans and also give a platform to showcase different potential projects.
Crowdfunding websites also have a positive track record for boosting projects by helping them achieve the funding they need. If you’re looking for a legit crowdfunding site, these are a few options to choose from:
GoFundMe (Donation crowdfunding)
On GoFundMe, entrepreneurs have raised approximately $5 worth of start-up funds. What this means is that there’s no loan to repay, equity to surrender, and no rewards to work towards.
The appeal is as good as it gets. Also, there are no added fees. Once you receive the funds, the transaction fees and putting your campaign out there will be yours to take care of.
This site is perfect for you if you have a business that brings together supporters to raise funds for the campaign – even though there’s no repayment involved. If you’ve already started your business and you’re in need of funds, try raising funds with GoFundMe.
Indiegogo (Rewards crowdfunding)
Indiegogo is among the best rewards crowdfunding sites that have assisted small businesses and startups to raise more than $1 billion. However, due to the ever-rising number of active campaigns, it may be difficult to get noticed.
If your business involves manufacturing consumer goods that can be brought into the market as rewards.
For every funded campaign, Indiegogo will charge a 5% fee. You’ll cater for the 2.9% transaction fee plus a transaction fee of 30 cents.
This can be compared to the most other crowdfunding sites, except that you have a massive nexus of potential backers.
Prosper (Debt crowdfunding)
Prosper provides personal loans that can be used in funding your startup business. From the moment it was founded, this site has originated a whopping $14 billion+ worth of loans.
After you complete a brief application, you can receive a crowdfunded loan of more than $40,000 from investors. You will, however, need to have an impressive credit score of 640 or higher.
To take care of your loan repayment, you’ll need to earn enough personal income. Every loan you take has an interest rate of 7-36% along with a 0.5 – 4.95% origination fee.
Crowdfunder (Equity crowdfunding)
Crowdfunder provides a one-of-a-kind affordable equity-based crowdfunding solution for all start-ups. To date, it has raised funds approximately $150 million for new businesses.
Depending on the investors you wish to gain access to, you may pay a monthly subscription of $499 or more.
To help you track your campaign, Crowdfunder has an effective CRM tool that also enables you to reach investors faster, thereby simplifying the funding process.
Its membership tiers are limited to three: free document storage, $299 every month for private crowdfunding and $499 monthly for public crowdfunding.
5. Take an SBA (Small Business Administration) Loan
Small Business Administration loans are typical start-up loans that are quite similar to the traditional SBA 7a loan.
As you probably know by now, not every business has the same needs – there’s nothing like a ‘one size fits all’.
Once you’ve done the necessary calculations and you’ve determined how much you need, the next step will be to figure out how to get it.
SBA loans are one of the first places you as a small business owner can think of getting all the funding you need. Follow these simple seven steps to secure an SBA start-up loan:
- Understand the type of SBA loan your business needs. SBA loans are classified into SBA 504 loans, microloans, express loans, and 7a loans.
- Determine the exact amount of money you need. To do that, you’ll need a comprehensive cash flow analysis of your small business.
- Determine how eligible your small business is for a loan. Focus on your personal credit score, down payment, collateral, and experience.
- Come up with an all-inclusive business plan. Among other things, your business plan should have an executive summary, product/service overview, and a target market.
- Work towards raising the required down payment. If they approve you for a loan of $100,000, they’ll subtract the down payment. You’ll have to find ways to make money.
- Find a suitable SBA lender to fund your startup. This may be a tad difficult considering they don’t put themselves out there.
- Fill out the necessary paperwork and put it forward. The underwriting process may take somewhere between 45 to 120 days depending on certain factors.
SBA start-ups are pretty much similar to normal SBA loans but it gets tricky when you need to find a lender who’s willing to fund your start-up.
If you won’t be lucky enough to get one, you have no choice but to put down 25-30% of the money from your own pocket.
There’s nothing as satisfying as building your business from scratch with the cash you have at hand. This common method of funding small businesses is known as bootstrapping.
You become a bootstrapper when as an entrepreneur, you strive to sustain your business at all costs. Of course, bootstrapping is a process that calls for creativity, proper planning, and frugal thinking.
Entrepreneurs who achieve a successful bootstrap have a clear understanding of how to stretch a short supply of funds for the benefit of their business.
Believe it or not, there are lots of frugal financing options aside from credit cards and loans. For one, you have the option of going minimalist. Think about it for a second.
You don’t need all the expensive brand new equipment when you can easily get by with your pre-owned, used ones instead.
You don’t have to get started on the direct mail campaign when you can otherwise get into the less-involving marketing activities.
If you’re single-handedly managing the affairs of your new business, it may cost you a lot compared to when you do it with the extra manpower.
Partnering up not only helps you venture into a new niche, but you also get to provide effective products and services to your target market. Before getting into a long-term partnership, be sure to pick someone that fits the part.
It’s also worth mentioning that you should be working in association with a certified attorney to come up with a contract that clearly outlines the terms and conditions of the partnership before getting down to business.
If neither of these bootstrapping options works for you, try out other budget-friendly options such as debt financing and capital investors.
The most essential thing to keep in mind is that by doing thorough research, you save yourself some costly mistakes.
Self-financing is a good idea, as long as you’re prepared to take the fall in case things go south. Still, it’s an option worth trying out especially if you’re in a position to source the much-needed funds from other viable options.
There are a number of ways you can go about self-financing your small business. You can start by checking how much you have in your personal piggy bank.
Regardless of whether it’s your family inheritance, it’s straight out of your checking account or it’s lying idle in an almost-forgotten money market account, don’t hold back.
Keeping away from loans and handouts is a clear demonstration of an entrepreneur’s commitment to potential investors. In the long run, this could go a long way in securing extra funding from interested parties.
If you have your own personal assets, put them up for sale. This has long been an effective way to raise money, though there could be certain tax implications linked to this idea.
Credit cards are also an effective way to take care of the cost of items needed in the launching of your business. Before you start swiping some credit cards, remember that they also come with relatively hefty interests for unpaid balances every month.
If you don’t live on someone else’s land, try borrowing against the equity in the home. HELs (Home equity loans) and HELOCs (Home equity lines of credit) are notable means of determining the value of your home.
On the other hand, if you don’t own a home and you’re understandably intimidated by credit card interest rates, try taking out a bank loan. Compared to credit cards, personal bank loans are handed out with lower interest rates.
As always, carry due diligence before putting the above personal finance tips into action.
8. Take a Shot at Your Friends and Family
Let’s face it, we’re not all cut out to take care of important financial ventures such as starting a new business. That’s why you can always turn to the people that you can trust: your friends and family.
Approaching bank officials you’ve never seen before can be really frightening – especially if you’ve never done it before. Well-to-do friends and family members, on the other hand, won’t be so hard to reach out to.
Your loved ones will also be more understanding when it comes to looking past your credit score and account balances when deciding whether they should extend a loan or not.
Moreover, they’ll be less likely to set out high-interest rates or strict repayment conditions. A recent survey done by the University of Pepperdine came to the conclusion that a whopping 68% of small businesses received funding from the friends and family of the owners.
As much as borrowing from those closest to you may sound like the perfect option for you, it also comes with its fair share of disadvantages.
If your business venture takes a plunge – God forbid – or your loan repayment takes longer than expected, how you relate with those who loaned you the money may change for the worst.
It may not seem like a big deal now, but the moment you need bigger funding for future projects, no one close to you will trust you enough to lend you money.
Finances are the root cause of family feuds and disagreements between friends. When you decide to reach out to friends and family for funding, ensure you have an outline of workable terms and conditions before doing so.
The terms must touch on the amount you plan on borrowing, the interest rates, and the repayment timetable.
9. Look for an Angel Investor
Angel investors are well-to-do individuals who like to put their money on startup ventures. In exchange, you’ll need to offer them an equity stake if your new business does better than expected.
Ordinarily, angel investors have had their fair share of success in a certain industry and they’re looking for fresh opportunities in a similar industry.
Angel investors do a lot more than just help your business to get off the ground. Some of them are willing to offer their guidance from their vast experience.
Finding an angel investor may cost you a ton of research. Most of them prefer to remain anonymous until a good business venture comes their way. Check with financial advisors and business owners in your area to see if they know anyone that fits that criteria.
Alternatively, you can try out the following organizations to get in touch with an angel investor who may be interested in funding your new business:
If you’ve read through this post from the top, you may have picked up one or two insights that will be beneficial to your new business. As with every new venture, don’t expect a swift success.
It’s a fact that only approximately half of new businesses last for more than five years, while a mere third stay operational after 10 years.
Before your new business can independently stand on its feet and have a chance of becoming profitable, settle for a creative and practical way of funding it.
The average cost of starting a new business is approximately $30,000. As high as the number may be, you at least have what it takes to finance your start-up. Don’t limit your options.
Now more than ever, you have a wide array of funding options to choose from.