updated - April 2, 2020 Thursday EDT
The often-quoted statistic is that 50 percent of new businesses fail within the first year. This is not true, in fact, you have a good chance of getting into your second year. However, that's when the real challenge of sustaining your business often begins.
Getting startup financing for a business can be a source of confusion and anxiety depending on how much capital you presently have. If you are like most startups, you have very little funding. This means that you will have to seek outside help in order to make your business or reality.
If the idea of seeking funding seems daunting because you have no idea where to begin looking for the money you will need, you will need a guide. The good news is, there are many options available for you to start a business. The right one depends on your needs, current finances and personal preferences.
Here is a guide, that shows some of the options available so that you can decide which one is right for you.
1. Get a Small Business Association Microloan
Getting a Small Business Association (SBA) microloan is one of the best options you have when you are starting a small business. The Small Business Association partners with community-based nonprofit lenders to give you loans. These loans usually start from $500 to as much as $50,000.
Interest rates on these loans tend to be within the single-digit or lower double digits. This means that you can get an eight to 13 percent interest rate on these loans.
These rates are virtually unheard-of for startups, this is why SBA Loans are such a great option. If low-interest rates were not amazing enough the SBA also offers mentorship when they give you a loan. This means that you will get valuable advice from experienced professionals on how to manage and market your business to set it up for success.
2. Get a Business Line of Credit
A business line of credit is another good option when you are starting a business since it provides a very flexible source of funding. A business line of credit is a hybrid between a business loan and a credit card.
One of the biggest advantages of having a line of credit is that you only pay interest on the money that you are using at any given time. For example, if you have a credit limit of $100,000 and you only use $10,000, you would only have to pay interest on the $10,000.
This means that you only borrow as needed. This helps you to keep your credit in check while growing your business. This type of funding is also easier to get if you do not have a perfect credit history.
3. Invoice Financing
Another type of financing that you may not have heard about is invoice financing. If your business already has one or two invoiced customers you may qualify for this type of loan.
Through this type of loan, you will be able to qualify for an advance on the cash value of your invoices. The more invoiced customers you have the more money you can get.
4. Get a Personal Loan
If you have a good credit history and you have a business idea it is very possible that the bank will give you a personal loan to finance your business. The advantage of this is that it's a very hassle-free process, especially if your credit history is good. You will find that there are no hidden fees and no excessive paperwork for you to fill out because your record speaks for itself.
However, there is a major disadvantage to taking out a personal loan to do business. The disadvantages are that if things go badly for your business then you are still obligated as an individual to repay the loan since you did not borrow it against your business.
When you take out a business loan the bank is in contract with your business not you as an individual so when things go bad you can declare bankruptcy. Any legal proceedings that the bank would want to take will be against your business and not to you as an individual.
This ensures that your home, car or any other property that you have is not held ransom by the bank for repayment of the loan. However, if you have a solid idea that you feel will be successful, it is probably worth taking the risk of getting a personal loan in order to finance your business.
5. Get Business Credit Cards
Business credit cards are another great option for financing your business. Just like a personal loan, this is another case in which you can leverage your excellent credit history to get access to the funds you need.
One of the major benefits of getting a business credit card is that you won't need to wait for months or even years to prove that you have a successful idea. Your credit history will speak for itself.
This type of financing gets even better because many business cards will give you a zero percent APR period. This means that for those first months when you're using the card you won't have any interest building on the balance.
In fact, when selecting a business credit card it's good to shop around because some cards will give you as much as twelve months with no interest. That's an entire year to get on your feet before you have to pay any interest on your debt. If you are really struggling you only need to pay the minimum payment balance on the card as well.
6. Consider Equity Financing
You can get funding for your startup without taking on any debt that comes with interest. You can do this through equity financing. In the tech industry, this is usually a great way to get funding for your startup.
If you have experience doing tech jobs then you can attract venture capitalists. Venture capitalist firms will take a look at your business plan and do a pre-money valuation. They will also take a look at your potential for revenue and on the team that you plan to use.
It's a good idea to already have all these things figured out so that when you do approach venture capitalists you will have an enticing marketing plan.
7. Family and Friends
Another option you may want to consider is asking friends and family to become investors in your business. However, before you go this route for business funding ensure that you have a solid business plan and that you outline in detail all that you plan to do to make your vision a reality.
You should let relatives and family know from the outset that any business is a risk and that it is possible that it may fail. Asking family and friends to finance you is always the last option because it can put these relationships in jeopardy.
However, for every story about discord in a family occurring due to business investment, there are many more success stories available. The upside of having friends and family invest in your business is that it creates a strong support system that will be very useful especially in the first year of business which tends to be the most difficult.
8. Personal funds
While it is often preached over and over again that you should separate your personal finances from your business finances, it is worth thinking about how much you are willing to invest in your own business.
If you're willing to ask friends and family and even go as far as getting investors to come in and put money in your business, there is nothing wrong with also investing some of your own personal funds into your startup.
However, if you are thinking about investing your personal funds into your business you should also make sure that you leave enough money available to pay all your bills. When you start a business, things can be difficult in the beginning, so always ensure that you have at least for six months worth of finances for personal needs
While you may be excited about your idea it is always best to exercise good judgment. Even the best business ideas can take a while to get off the ground. The last thing you want is to be struggling with your personal finances and your business finances at the same time.
A Final Look at Startup Financing
Getting the startup financing you need to start your business is usually one of the most difficult hurdles you will face. When you have little or no money to begin your business things can become overwhelming.
Fortunately, there are many options available that will help you to fulfill your dream even with limited cash. It is all a matter of figuring out what will work best for your situation.
The good news is that there are many businesses that have been in the same position that you now find yourself and they have managed to succeed. If you would like more business tips, please visit the marketing section of our website.
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