14 Ways to Find Money for Your Business
This is the most attractive option is when the money comes from your checking account, savings account, funds sitting in an old money market account, or where ever else. Self-financing can demonstrate commitment in the eyes of investors.
II. Personal Assets
Selling assets for cash is a time-tested way to raise money, but there can be tax implications with real estate and stocks.
III. Credit cards
Credit cards have provided some of the financing for a large percentage of startups for decades. Credit cards come with alarmingly high interest rates for balances that remain unpaid. Try to use cards offering rewards or cash-back programs for business purchases and look for credit cards with a low or 0% introductory annual interest rate (APR).
IV. Put Up Your Home
Home equity lines of credit (HELOCs) and home equity loans (HELs) are popular ways to access cash. Many lenders require borrowers to retain at least a 20% ownership stake in the business. With a HEL, you borrow a fixed amount with defined repayment terms under fixed or variable interest rates, and there are usually closing costs. With a HELOC, you can borrow up to a specified sum as needed, paying interest only on the amount actually borrowed. Most HELOCs do not have closing fees.
V. Take Out a Bank Loan
Personal bank loans come with lower interest rates than credit cards. No-recourse loans are rare. Perhaps you can find a co-signer with good credit. It is even better if the co-signer also agrees to be responsible for the debt upon default.
VI. Cash in Retirement Accounts
There can be very steep penalties for early withdrawals of funds in your IRA or 401k. However, some advisors argue that there is legal way to avoid those penalties. It goes like this: You move funds from an existing 401k plan into a new 401k plan that has been created by a C corp. Then you invest the 401k money in company stock. Known as ROBS (rollover for business startup), these plans are popularly promoted online. Some industry observers have argued that ROBS plans do not meet ERISA requirements.
Many 401k plans offer an option that gives borrowers as much as 50% of the balance with a ceiling of $50,000.
VII. Friends and Family
The people you know best are less likely to demand stringent repayment terms or high interest rates; you may avoid interest rates altogether. Borrowing from a friend or family member is a very popular option. A 2015 survey found that 68% of small businesses got at least some of their financing from friends and family. But what if the venture fails? When you default on a credit card or bank loan, you do not usually worry about a Thanksgiving dinner. No matter what, be sure all terms are set forth in writing.
VIII. Small Business Administration (SBA) Loans
The SBA does not lend money directly to borrowers but it has an impressive assortment of guaranty programs for qualifying banks, credit unions, and nonprofits.
SBA 7(a) loans
SBA 7(a) loans are a very common way to fund small businesses. These loans can be used to launch a new business or to grow an ongoing business. The program does not work for loans over $5 million.
For loans up to $150,000, the SBA will only guarantee a maximum of 85%. Borrowers need to have at least a 20% stake in the business and personally guarantee the loan. Loan proceeds cannot be used to repay delinquent taxes, finance business ownership transactions or refinance existing debt. 7(a) loans cannot be used to lend money. They are not available to: a) businesses that are based outside the U.S., 2) companies earning a third of their revenue from gambling, or 3) companies engaged in pyramid schemes.
Specialized loan packages offered under the 7(a) umbrella, including the SBA Express Program, have a streamlined approval process for loans of up to $350,000.
Interest rates on 7(a) loans depend on the lender, the size of the loan, and the borrower’s credit history. There are no fees on loans less than $150,000. A fee of 3% is set on the portion guaranteed by the SBA on loans of between $150,000 and $700,000 that mature in more than one year. The rate goes up to 3.5% for loans over $700,000. These fees, seemingly paid by the lender, are often included in the borrower’s closing costs. 7(a) loans are repaid in monthly payments that include both principal and interest. Interest-only payments are permissible during a business’s startup and expansion phases, subject to negotiation.
SBA-backed 7(a) loans are a popular vehicle for all small businesses. But an existing business with several years of financials is the sweet spot for SBA loan decision-makers.
Microloans are particularly attractive for borrowers with weak credit scores and few assets and who would be therefore unlikely to secure a traditional bank loan or 7(a) loan. Many microloan lenders are community organizations that offer specialized programs to assist entrepreneurs in certain business categories or demographic groups.
The SBA Microloan Program provides loans of up to $50,000 to fund startup and expansion costs. Microloans can be used to finance loans for equipment, supplies, and inventory, or as working capital for the business. These loans cannot be used to repay existing debt. The SBA said in 2017 that the average microloan amount was about $16,000.
The SBA requires all microloans to be repaid within six years. Interest rates on microloans are negotiated between the borrower and the lender, but typically fall between 8% and 13%.
Microloan offices can be found at SBA District Offices.
IX. Venture Capital
VC firms are highly selective and they strongly prefer ongoing businesses. Competition for VC funding is intense. Individual VC firms receive thousands of proposals a year. Investments minimums of $250,000 or more are common. VCs only invest in startups with the potential for explosive growth. Think unicorn.
X. Angel Investors
Some retired, very successful businessmen will invest in startup ventures in exchange for a equity position. Typically, an angel investor has been successful at creating and running a business and is now looking for more passive opportunities. Some angels enjoy offering guidance based on their own experience. Some can ask LinkedIn contacts to open doors for your business.
The following is only a partial list of organizations that can put you in contact with angel investors, both individuals and groups:
- Tech Coast Angels
- Investors’ Circle
- Golden Seeds LLC
- Band of Angels
- Hyde Park Angels
- Alliance of Angels
- Angel Capital Association
You might try cold calling. Maybe you can meet someone at an investment conference. Some prominent angels hold periodic conferences and have networking meetings. Angel investors typically only do two to four deals per year, usually in the $50,000 to $250,000 per deal range. Your elevator speech/pitch deck must address why your service or product is a winner, why it will stand out in the market, why you are the right person to run it, and what the expected return is.
XI. Investment Platforms
Investment platforms take a cut of any money you raise through them. You need a good story to expand on the pitch deck. Emphasize your commitment to the business. Popular crowdfunding platforms include:
XII. P2P Platforms
Peer-to-peer (P2P) lending gives borrowers access to money other than from a traditional bank or investment company. P2P platforms give borrowers the opportunity to ask for a given amount and the reason for the loan. Lenders review the borrower’s submission and agree or not to lend an amount of money up to the amount sought. The borrower pays back with fixed monthly payments made to the platform. The platform pays the investors their return.
Borrowers must enjoy decent credit scores.
P2P platforms and other online forums are now a major source of small business funding. A study from the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia found that 20% of small businesses had borrowed from an online lender. Approval rates are higher with online lenders than with banks. Borrowers must submit financials that will be assessed by managers of the platform. Borrowers typically have a good idea but need both money and guidance.
XIII. Business incubators are organizations that provide services and support to fledgling companies. Business incubators are run by VCs, government agencies, universities and others. They nurture new businesses by providing marketing, networking, infrastructure, and financing assistance. Idealab, founded in 1995 by PIMCO co-founder Bill Gross, has helped launch over 135 companies, at least 40 of which have gone on to hold an IPO or to be acquired.
To become involved in an incubator program, the business owner must complete a lengthy application process and demonstrate a strong likelihood of success. Competition for a spot in an incubator can be stiff. A listing of business incubators in the U.S. can be obtained through the National Business Incubator Association.
Many small businesses are started with money obtained from a mix of different sources. Even if you land a significant bank or SBA loan, you may still seek additional cash from friends and family, or yourself. There will always be unanticipated events and expenses.
XIV. The JOBS Act
Rule 506(c permits public marketing of private equity for the first time in over 85 years. Regulation D, Regulation S, and other investment crowdfunding vehicles have profoundly transformed the early stage capital market.
Many small businesses are started with money obtained from a mix of different sources. Even if you land a bank or SBA loan, you may still want additional cash. There will always be unanticipated events and expenses. For a startup cost calculator go to Entrepreneur.com.
Bottom line: New financing sources like crowdfunding and peer-to-peer lending offer small business owners a range of new financing options.