6 Financing Options for Startup Businesses
Bank loans for startups aren’t easy to secure. If you're unable to qualify for a bank loan, consider one of these financing options.
As a startup, chances are you have no shortage of ideas and enthusiasm for your new venture, but you’re more likely to be short on capital. Whether you need to rent office space, purchase inventory, or pay your first employees, you could probably benefit from an influx of cash by financing your business. Banks, however, aren’t eager to grant a loan to a company without a proven track record. So just where can you go to acquire those much-needed funds? The following are six financing options for startup businesses if your bank refused to give you a loan.
6 Financing Options for Startup Businesses
In the spirit of promoting entrepreneurship, some private companies and non-profits offer small loans of up to $50,000 for individuals and businesses that may not otherwise qualify for a bank loan. Called microloans, these small, short-term loans feature lower interest rates than some other alternative financing options and are typically extended to startup companies or self-employed individuals.
More flexible than a bank when it comes to lending criteria, microlenders tend to look at the whole picture. In addition to capital, some non-profit lenders may also provide training and education, making microloans an appealing option for startups.
Reward Based Crowdfunding
A popular and relatively new source of business funding, crowdfunding can help new businesses get off the ground. Online platforms like Indiegogo and Kickstarter offer virtual strangers (pun intended) a chance to lend their support if they believe in your concept.
Backers can pledge at varying levels, and in return, may receive rewards that showcase the business. For example, a chef seeking cash to open a restaurant may offer everything from t-shirts bearing the eatery’s logo to a catered dinner party should the venture be fully funded.
Crowdfunding is particularly attractive to entrepreneurs because they don’t incur any debt, nor sacrifice any equity in exchange for the investment.
It’s not uncommon for startups to turn to credit cards to finance their business. Many banks offer credit cards designed specifically for small businesses with better perks than personal credit cards.
Family and Friends
Remember the old adage Never mix business with pleasure? It can be hard to heed when you’re in need of funds and you know people who are ready and willing to back your idea. Having commitments from friends and family also can help you establish credibility when you’re seeking outside investors. Let’s face it: If your nearest and dearest don’t believe in your idea, why should other investors?
Very often friends and relatives serve as the main source of funding for early startups; if you decide to accept an investment from this group, be sure to put everything in writing just as you would with an outside investor. A promissory note establishes how much you’re borrowing and the terms of the loan. This simple document can help prevent confusion or hard feelings down the line.
As unpleasant as it might be, it’s also a good idea to discuss the risks and the potential for failure before accepting their investments.
If you’re going to pursue additional investors, they’re going to want to see that you’ve got some skin in the game. That means putting your money where your mouth is by investing your own savings in your startup. While this option allows you plenty of autonomy and control of the business, it can be daunting because you’re simultaneously pecking away at your nest egg.
It can be challenging to determine what percentage of your personal savings to use. You may want to keep part of your savings account reserved to help you cover the first several months of expenses should revenue not pour in immediately.
If you have a 401(k) or IRA, you can speak with a financial planner or third-party retirement plan administrator to learn about your borrowing and withdrawal options. Some entrepreneurs choose to take a loan against their 401(k) and pay themselves back with interest. Others opt for ROBS or Rollovers as Business Startups, which allows them to use the funds in their retirement account to start a business or purchase an existing one without paying taxes on the funds or being subjected to the typical early withdrawal penalties. Again, it’s important to review your options with an expert before proceeding.
Salary From Your Existing Job
Many startups get off the ground as a hobby. When you keep your full-time job while building your business, it gives you the option to use part of your paycheck to fund your startup. This method can prevent you from becoming beholden to investors, although you might decide you still want to get a microloan in case you need a larger lump sum than your paycheck can provide. In this case, having a steady stream of income from your day job will help you qualify for a business loan.
Keeping your job may also be a good idea if you know it could be a while before revenue is coming in from your new business. Based on your salary and expenses, you could be able to establish a timeframe for leaving your position to pursue your new endeavor full-time. If consulting on the side is an option, this is another great way to gain experience and a bit of extra income that you can funnel into your startup.
If you’ve been denied a traditional bank loan, you don’t have to allow it to sideline your startup. There are multiple alternative financing options. Just be sure to weigh the pros and cons of each carefully before making your selection.