When starting a new business, there’s a lot you need to manage. One of the most important things to keep in mind is how you will actually finance your business. Fortunately, there are several options you can pursue.
Get a Traditional Loan
One of the first means of financing people look into is a traditional business loan. These loans will function much like any other bank loan. You apply for the loan, get approved, and then eventually you will pay it back. For a business loan, there are several ways you can prepare. One of the most important things you’ll need is a business plan. Your lender will want to know how you will use the money and whether or not your plan will reliably allow you to pay back the loan. Additionally, you will need to provide your personal information and relevant financial statements. While you can get a loan from a bank, you can also get an SBA loan. The Small Business Administration (SBA) is used to help ensure loans are paid if a business defaults and it provides more security to the lender.
If you have the means, you can also fund your business on your own. There are several ways you can do this. First, you can dip into your own savings to fund your business. If you choose to do this, make sure you don’t use all of your savings as this can leave you in a precarious financial situation. Another way you can fund your new business is through an additional income stream. For example, you can have a side job or do consulting work to provide you with enough income to fund your new business until it becomes financially independent.
Use a Rollover for Business Startups
A Rollover for Business Startups (ROBS) is a financial solution that allows you to use your retirement plan in order to fund your business. With ROBS, you will start a C corporation and then take all the funds from your current 401K plan and roll them over into the 401K plan for the C corporation. The benefit of this method is it allows you to fund your business if you don’t qualify for a traditional loan. It also allows you to use your retirement funds early without having to pay significant taxes. There is also potential for a large payout when using this method. Keep in mind that you are putting your retirement at risk and if your business fails, you will not have any money saved for retirement.
Borrow From Friends and Family
Another option for funding your business is to borrow from friends and family. When you borrow from friends and family, you typically don’t need to pay any interest (unless they insist) and you can also have more flexibility. Instead of having to pay back a loan by a certain date, you can negotiate with your friends and family and even find other means of compensating them. When asking friends and family for money, make sure you prepare a good sales pitch to show them that you will use their money well and have a plan to turn a profit.
Of all crowdfunding campaigns, 40% are business-focused. This shows that it is a fairly common source of financing a business. With crowdfunding, you appeal to a large group of people and have them each donate a small amount of money. This way it isn’t a major risk to any individual and it allows a lot of people to get involved. This form of financing your business can be most effective if your business affects a large population or appeals to their values. People are more willing to donate money to something they deeply care about, so show them why they should care about your business.
Use Peer-to-Peer Lending
In some cases, it may be difficult to secure a loan through more traditional means like a bank or other financial institution. Fortunately, a new type of lending has arisen. Peer-to-peer lending is an online system that allows borrowers to connect directly with lenders. These lenders can seek out businesses that they feel are worth the risk and finance them. This system is beneficial to both the lender and the borrower.
Look for an Angel Investor
While loans can be a great way to get financing and get your business running, you will eventually have to pay back that money whether or not your business is successful. A great alternative is looking for an angel investor. An angel investor is someone who is generally already successful and looking for worthy investments. They won’t expect you to pay back the loan, but they will have part ownership in your business. If all goes well, you will both reap the financial rewards.
Work with a Venture Capitalist
If you’re looking to grow your business quickly, you can consider working with a venture capitalist. Venture capitalists are private investors who look for businesses they believe have the potential for large growth. The money they give you is yours to keep, but they will own a stake in your company. Many venture capitalists also have business connections that can help you expand your business.
When getting a loan, it may be daunting to think about how much you will eventually pay back. To ease your financial stress, you can consider getting a microloan. With a microloan, you take out a very small amount of money with low interest. These types of loans are excellent for anyone with a low credit score, no collateral, or steady employment. Microloans can give you just enough money to get the ball rolling.
Enter a Contest
This may seem like an unbelievable option, but there are actually contests you can enter in order to secure financing for your business. Entering a pitch competition allows you to propose your business to potential investors along with many other pitches. Often, even those who don’t win still receive funding because their pitch was so appealing to the investors.
As you start your business, you might feel limited in how to finance your new venture. However, there are so many different options you can pursue in order to fund your business. In fact, you could even use multiple methods of financing in order to get your business off the ground.
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