Every small business owner knows that financing can be simultaneously one of the most important and most difficult challenges a company faces. There’s startup capital, there’s funds to tide you through the lean years, there’s money needed to expand your scope. We’ll break down your options for financing a business, and walk through the process for acquiring funds.
1. Small business loans
If you need a significant amount of capital to fund your business, a small business loan can provide hundreds of thousands of dollars at a relatively low interest rate. You might find yourself borrowing money you don’t need, but all things considered, a small business loan is one of the less expensive ways to secure funding. If you go this route, consider a credit union or community lender instead of a big, nationwide bank. The former group approves around 50% of applications, while the latter approves just 17%.
2. Crowdfunding platforms
Kickstarter, Indiegogo and the like offer a way to go directly to the masses and solicit funding. You’ve probably heard how they work: you make your pitch and post it on the platform, and people can contribute toward your fundraising goal. In some cases, you can keep the money you raise even if you don’t make your goal; with others, it’s all or nothing. The downside of these platforms is that the transaction cost can be quite steep, ranging from 5-10% of the amount raised. Unless your business is easily understood by consumers and has a sexy story, you might be better off pursuing other options.
3. Advance orders
If you have a clear value proposition and already have customers lined up, consider raising money through advance orders or presale. This not only provides you with working capital, but it also serves to validate your business idea in a way that no amount of market research can.
4. Personal assets and savings
The simplest form of funding to acquire is your pre-existing money – your investor pitch is pretty easy. You can also lower the interest rates on your loan by offering up your home or car as collateral. But there are significant risks to cashing in your 401(k), taking out a personally guaranteed loan, or using your emergency funds.
Think of it this way. Typically, when you work for someone else, your money is diversified. You have some money in potentially high-risk investments, you have some (promised) money in your job, you might have guaranteed health care benefits that will continue for a while if you lose your job, you have wealth in your house, and you have risk-free money in deposit accounts. If you cash in your investments and savings, you’re income streams are entirely dependent on your business doing well. That’s hardly a diverse portfolio, and one that exposes you to significant risk.
Finally, you can take advantage of grants from nonprofits and government alike. High-tech, high-impact and high-growth businesses can be eligible for the Small Business Innovation Research Program, which funds R&D projects; certain up-and-coming cities like Columbus and Philadelphia offer incentives to startups based there. You can also consider partnering with a university to increase your chances of being eligible. Check Grants.gov to see what you qualify for.
Source: Forbes Article by Tim Chen is CEO of NerdWallet.com which provides financial advice, from taxes to entrepreneurship.