In a nutshell: Funding is one of the biggest challenges for a startup. Here are some options to help you get off the ground.
Small businesses make up 99.7 percent of all businesses in the United States, according to the U.S. Small Business Administration (SBA). So, you’re in good company as you embark on this journey.
The first step is to determine how much money you’ll need. understand all your costs including expenses, like market research, advertising, training, wages and consultants, and capital expenditures like inventory, property and vehicles, according to the SBA’s “How to Estimate the Cost of Starting a Business from Scratch.” Assess your assets that can be used to operate during the startup phase of the business, and do the math.
Once you have an idea of what you need, there are several ways to fund your startup business:
- Credit cards: A National Small Business Association-Arthur Andersen survey found about half of all small businesses use credit cards to finance their establishment or expansion. While credit cards are easy and convenient, use them with caution. Interest rates can be sky high and penalties for not making minimum payments may wipe out your cash flow.
- Bank loan: Recently, big banks have improved their relationships with small businesses, which is good news for you. Some lenders offer specialized programs for startups; it’s best to network with other entrepreneurs in your industry and area to see which banks may be able to fund you. When screening potential lenders, ask about the type and size of loans offered to determine the best fit for you.
- SBA loan: You may find funding your company with an SBA loan instead of a bank loan may be better for you. According to U.S. Bank, SBA loans may provide up to 90 percent financing and have repayment terms up to 25 years. There are also multiple SBA-guaranteed loan programs, including those for general business purposes, financing fixed assets and short-term startup or expansion loans.
- 401(k): If you’ve considered tapping into your existing 401(k) or IRA to open or buy a business, look at a rollover for business startups (ROBS) option. While the process can be complicated, it allows you to avoid paying taxes on the withdrawn funds or taking an early withdrawal penalty. According to CNN Money’s “Should You Drain Your 401(k) to Start a Business?” you must incorporate your new business and open a new 401(k) plan under it, then roll your existing 401(k) into it. Your company can then issue shares to be purchased with your new 401(k) plan and the funds that are raised from those shares can be used for operational expenses (excluding owners’ salaries).
- Crowdfunding: If you have a big network of supporters (or potential supporters), like friends, family, acquaintances, business associates and social media contacts, this may be a way for you to jump-start your business. It’s self-driven, which is some entrepreneurs prefer to borrowing money. The two most popular platforms, Kickstarter and Indiegogo, are donation-based crowdfunding sites and don’t allow supporters to become investors in the business. According to Inc.’s “How to Use Kickstarter to Launch a Business,” some fundraisers offer products or services based on donation level to incentivize their contacts.
- Friends and family: Have a specific pitch (even if you’re pitching to your parents) and keep it professional, so you can preserve personal relationships. According to Entrepreneur’s “Five Tips for Asking Friends and Family for Funding,” you should also determine your strategy ahead of time: Will you approach a few people for larger sums of money or many people for smaller amounts? Decide on whether you will repay people, offer an equity stake or give products or services as a token of appreciation.
Determining the method of funding your startup business shouldn’t be taken lightly. A well-laid plan may mean the difference between failure and success. Take a close look at all of your options and find what will allow you to achieve your dreams.