A startup’s largest challenge is securing the funding it needs to get off the ground. Most startups require some amount of seed money to start a business. But without any history of credit or revenue, they can face difficulties securing a loan. Learn how to get Startup Business Financing.
Fortunately, there are several funding options for startup founders who need cash to see their entrepreneurial ideas. Here’s a guide to financing startups at all stages.
Options for Your Initial Funding
Personal Loan
Personal loans can be especially useful for newer businesses without established business histories. If you’re a business owner in this situation. Personal loans for business often have lower interest rates than many other business loans you’d typically qualify for.
If you have a great credit score, personal loans for small businesses could be an excellent way to finance your new venture. You’ll need to have a credit score of 700 or above to consider. It is a viable option and verifiable income over 50K and again. Nothing about your business will get consideration in your application.
It can be much less expensive than a business loan, with an 8 % APR. Great for customers with limited business history, repaid monthly rather than weekly or daily, and reports to your personal credit history. Some prefer to separate business from personal finances and 3 to 7-year terms for low monthly payments.
Business Credit Card
If your business is new, you won’t have a business credit history—the commercial equivalent of your personal credit history.
It’s normal—your business is just starting up, and you haven’t had the chance to borrow for a business.
Not having a business credit history means you have to personally guarantee your new business credit cards. This, in turn, means you can leverage your personal credit history to secure startup business credit cards.
However, if you lack sufficient personal credit history or your credit history is under 700. As you set out to secure the best business credit cards for new businesses, this might spell a challenge.
Consider building a personal credit history with a secured credit card before setting off your search for startup business funding.
Friends and Family Loans
An alternative way to find the money for a startup is to reach out to friends and family. At the same time, many founders hesitate to approach friends and family (because of the potential for emotional and relational conflict). It’s one of the most successful ways for early-stage entrepreneurs to find capital.
The business owner can enjoy the benefits of a low- or no-interest loan. At the same time, the family member or friend uses their cash to foster a dream and support a vision. Depending upon the relationships, it can be easier for an early-stage entrepreneur to obtain a loan from a family member or friend than a traditional business loan. However, we recommend having a contract and terms of agreement for both parties.
This option is especially nice for any startup owner. Who can access influential contacts or family and friends with money available for investing? As long as the business owner can prove his or her idea is a viable business and show a plan to generate revenue. A loan from friends or family members is usually without any pre-qualifications. Check out our Family and Friends Financing Guide for more information on friends and family loans.
Startup-Financing Crowdfunding
Crowdfunding has helped launch hundreds of businesses. At the same time, other types of funding require a certain number of years in business or a minimum profit. Crowdfunding allows a startup founder with a great idea to often bypass those requirements.
What is crowdfunding? A startup develops a well-thought-out business plan prototype of their idea or service. They then pitch these ideas to the public through an online crowdfunding portal. The ideas are by crowds of people willing to invest in exchange for an exclusive gift, pre-orders, or just because they want to help. In recent years, some crowdfunding platforms (because of changes in the law) allow a business owner to offer equity in exchange for investment.
For more information on crowdfunding, including how to make your campaign successful, check out our Guide to Crowdfunding.
Angel Investors
An angel investor is an individual with private money to invest in a company in anticipation of an exit (or equity event) in the future. Most angel investors show interest in the next generation of ideas and are willing to fund startup ideas they believe in. As a consequence, they tend to focus heavily on technology startups.
Receiving funding from an angel is relatively straightforward, although finding the right angle can be challenging. There are online communities where angels congregate, and your local university is another good place to look. A Google search in your area for angel investors will likely reveal groups closer to your business. The business owner raises capital by selling equity in the company. Typical shares granted to angels range from 10-50% of the business.
This funding option can be a good fit for technology businesses beyond the beginning startup stages. But still, need guidance with marketing and product creation. An angel investor may provide money and mentorship for a startup owner looking for more experienced partners or guidance.
SBA Loans
The Small Business Administration (SBA) offers loan guarantee programs from participating banks and other financial institutions. Some advantages of an SBA loan could include attractive payment terms, better repayment options, and smaller down payment compared to other traditional financing options, which leads to better cash flow for a startup.
7(a) small business loan program. This is the most common type of SBA funding for startups. To be eligible, a business startup must be for-profit and fall within the “small business” standards of the SBA. There are usually lower collateral requirements and longer terms compared to conventional funding. Check out our Guide to SBA Loans for more info on SBA loans.
Microloans. Microloans are a type of SBA loan to startups to use as working capital for inventory, supplies, machinery, equipment, and furniture. The average microloan is about $13,000, and the maximum is $50,000. Funds from a microloan cannot be used to pay past debts or purchase real estate.
Both programs are best for startups that are two years of age or older and in a good revenue-generating cycle. Traditional SBA loans generally take anywhere from 60-90 days for approval and processing to finalize, with amounts of $150K or more being distributed at once.
Home Equity Loans
For business owners with equity in their homes, it’s not uncommon for an entrepreneur to seek a home equity loan to fund a startup. Granted, while this plan can provide needed capital, it does put a homeowner’s place of residence at risk.
The amount of money a startup could potentially use for funding from a home equity loan varies based on the home’s value and how much is owed on the current mortgage.
With this loan, the business owner will receive the entire amount of the funds simultaneously. Though the terms vary, a homeowner will likely be required to pay back the home equity loan based on a 15-year term.
Retirement Loans from a 401k
A 401K loan is a specific type of loan that involves a unique legal structure, which a third party manages. The money comes from the borrower’s retirement funds, taken from an IRA or other investment account, and put into a “new investment” (the new business). This type of loan probably shouldn’t be the first on any startup founder’s list because it puts the small business owner’s retirement savings at risk.
If the business plan is solid, the return on investment could be much higher than a traditional investment account or retirement fund. 401k financing is relatively new and requires a unique legal structure – if you go this route, make sure you are working with a reputable firm and have everything reviewed by your attorney.
BitX Funding is an online marketplace for small business owners looking to fund a project. We specialize in connecting small business owners with lenders who will compete for your business. We believe small business owners drive the economy and are passionate about helping your company reach its full potential.
You can reach a loan specialist toll-free at 1-800-824-2407, email [email protected], or apply online here, and we can guide you on which loan is the best fit for your business.
