Financing Options for Your Business or Startup
You have a knock-out idea and you’re ready to start a business. But how will you fund it? You have plenty of options, but you need the proper approach. Even if you’re asking your mom for help, you need to determine how much money you need and how long that amount will last. Creating a robust business plan, while not required for all financing options, is always a good exercise for testing the viability of your idea.
When you need money to launch a new business or a startup, consider these eight business financing options.
Business Financing Money from Family & Friends
Friends and family are a logical, and popular, resource for new entrepreneurs. But tread carefully. Loan repayments can be a tremendous source of stress if terms aren’t laid out clearly. The SBA has a list of six tips for borrowing from friends and family. Bottom line: do your homework before you make the startup financing pitch and make sure you document everything as you would with a more traditional investor or lender to avoid future conflict.
Use a Credit Card
Credit cards are an easy way to get money fast, but they usually come with higher interest rates, and debt accumulates quickly if you don’t pay your balance in full every month. If you have the cash and are looking for bonus rewards they offer, credit cards can be a great way to float a larger purchase for the month. At MECU, we offer a Business Platinum Credit Card to help your business needs.
But there are risks. Depending on your business structure, you might be the personal guarantor on all debts, meaning that if you fall behind on payments, your personal credit rating suffers. Also, if your business is incorporated, your credit card issuer can still require that main shareholders guarantee the line of credit, putting your personal credit on the line again. (Check your where you are with our credit card payoff calculator.)
Get a Bank or Credit Union Loan
If you want a traditional bank or credit union loan, a comprehensive business plan is an absolute must. Bank or credit union loans can be difficult for new businesses to obtain because they usually require several years of profit-and-loss statements. That’s one of a few reasons why banks may say no to a startup loan; however, depending on your plan, your presentation and the financial institution you approach, you could find small business loans available to you. That’s not to say there isn’t hope, at MECU, we have a business line of credit that can help when you need money fast. Talking to one of our business specialists can help if you are interested in this.
Small Business Administration (SBA) Loan
An alternative to a traditional bank or credit union loan is a loan backed by the SBA, a division of the federal government. The SBA doesn’t lend directly to small business, but instead serves as the guarantor and co-signer for loans you’d get from an SBA-approved lender, such as MECU. Regardless of your funding status, the SBA can serve as a great resource for education and mentoring at any stage of your business journey.
Crowdfunding started as a platform to raise money for nonprofits and charity projects and quickly morphed into an option for business funding, especially after federal legislation was passed to encourage alternatives to traditional funding. Crowdfunding can be effective for small, community businesses that can receive monetary support from the people they serve.
Setting up a crowdfunding account for your business requires a strong marketing campaign, because that’s how you pitch your idea and encourage investment. Take care to read the fine print when comparing platforms since not all crowdfunding systems are created equal in terms of fees, which can differ based on your industry.
Angel investors are usually affluent individuals who invest in startups in the earliest stages in exchange for an equity ownership (typically 20-25%). They are different from venture capitalists in that they provide seed funding, less than $1 million, whereas venture capitalists invest larger amounts in more established growing companies.
To find an angel investor, search investor networks that may exist in your niche, industry or community. Angel investors are looking for strong returns on investment, so showing them how their investment can make a difference will strengthen your position.
Borrow from your 401(k)
Called Rollovers for Business Start-ups (ROBS), this is one way to bring over some money from your 401(k) for debt-free funding. Consider this option if you plan to use more than $50,000 from your account. Partnering with a ROBS expert is the best way to ensure you follow the rollover’s specific rules. For example, there can be fewer tax penalties if you set up your company as a C corporation and follow the requirements that your new company must sponsor a 401(k) plan. As with all tax-related matters, it’s best to consult your accountant for complete details.
Microloans, ranging from $500 to $35,000, are typically short-term loans with a low-interest rate available specifically to self-employed people, new startups with low capital, or small businesses with a small staff. They can be easier to qualify for as a small business startup than a traditional bank or credit union loan and can help bridge any gaps between the money you have and the money you need.
The best place to start researching options is the SBA website. Then, check out resources through your local Small Business Development Center, Women's Business Center, Veteran's Business Center and the mentoring experts at SCORE as narrow your focus to specific needs.
No matter what stage of business you are in, feel free to stop by one of our branches and speak with our small business specialists. We would be happy to answer any questions you may have and see how we can help.