You have an idea you are excited about, a passion you can channel to benefit others, and a solution people need. You’re ready to reap rewards you’ll never get from working for somebody else. That is awesome. You are ready to start a business.
That idea, that passion, that solution to a problem has to get to the market, and that takes money. How do you get the funding you need to start a business? It’s a big question, and here are some answers.
This is your idea, so the first place to look for funding is obviously your own assets and your own collateral.
Of course, if you have savings, you can use them. Having skin in the game is important. If you are quitting your day job to start this venture, though, be sure you have enough savings, not just for the business, but to live on while the business ramps up.
⚠️ Using your emergency fund as business capital is a risky proposition!
A Home Equity Line Of Credit (HELOC)
Homeowners with equity can use some of that equity to start a business. Requirements for HELOC loans have gotten tighter in the past 10 years, with most lenders requiring at least 20% of the home’s value to remain in the property.
I can say from personal experience that a HELOC is a helpful way to get money to start a business. I am also glad both the bank and I had the sense to stay above water on the loan! In no case do you want to owe more than your home is worth.
Remember that if you fail to pay, your home is at risk.
A Credit Card
This is a thing people do, but you should proceed with caution. It is the equivalent of going to a hard money lender for a loan to purchase an investment property (in other words, the terms and the interest rates are not in your favor).
Using credit cards as startup seed money is a last resort, and you should be sure the business can pay it back sooner than later. Credit card interest piles up brutally fast.
A Bank Loan
If you don’t own a home, you can approach the bank for a collateralized or noncollateralized loan. This can be tricky without collateral unless your credit score is excellent.
If there is a business partner or someone you know who could co-sign, that would be great. Just be sure that the other party is fully aware of the risk of co-signing a loan and that your relationship can manage the strain this kind of financial connection can bring.
If your business has collateral in the form of equipment or inventory, that could be sufficient to secure the loan without a co-signer.
💡 Tip: Funding your own business idea requires some caution. Starting a business is exciting, and excitement can lead to bad decisions.
Think of yourself as an investor, and ask yourself the same questions you’d ask before investing in someone else’s business. No investor would put money into a business without a clear and compelling business plan, and neither should you, even if it’s your business. Putting on your investor hat and asking yourself the same questions an investor would ask can help you refine your ideas and prepare for potential problems.
Preparing a business plan just to persuade yourself may seem like a lot of work, but it can save you a great deal of trouble and expense.
Crowdfunding can get you the money you need to start a business. If you have helped a friend build their dream of a sock knitting business or run across a fascinating story about a unique product (like a foldable kayak – a real thing) through Kickstarter or a similar platform, you have seen crowdfunding at work.
This is also a great way to tell your story and for friends and people in your network to support you. You can build some capital and market the new business at the same time, especially if you offer something of value related to the business as an incentive to invest.
Look at Kickstarter and other crowdfunding platforms. Don’t just dive on and make your pitch. Study the platform you’ve chosen. Look at what projects do well and how they pitch themselves. There are lots of ideas competing for crowdfunding dollars. Research will raise your chances of success.
3. SBA Loans
A Small Business Administration (SBA) loan will not just provide you with the financial backing you need to get your business off the ground. It will also force you to get your strategic planning ducks in a row. The SBA has rigorous standards and guidelines for the application process and for the terms of the loans themselves. You’ll have to do some work to meet the requirements, but the terms are excellent, and you’ll know your proposal has been professionally vetted.
Loans are guaranteed by the Small Business Administration, but funding comes from qualified banks, credit unions, and other lending institutions. There are several SBA products, but for our purposes here, I will highlight two.
SBA 7(a) Loan
This is one of the more popular products SBA offers. The application and approval process takes some time, so this is not a source of immediate cash infusion for your business.
That being said, there is a lot of upsides, with low interest rates, no minimum loan amount, and a maximum of $5 million.
SBA Microloan Program
For loans of $50,000 and under, this can be an excellent program. Local nonprofit lenders like Pennsylvania’s Community First Fund do an outstanding job of building up local businesses–both new and established–with these types of loans.
You can use SBA microloans to finance the supplies, inventory, or equipment or as working capital for the business. You can’t use them to pay off debt.
You’ll need to be organized and prepared, but SBA loans are one of the top ways to get money to start a business if you can qualify.
4. Angel Investors
Looking to go beyond your own resources or your parent’s nest egg? An angel investor might be the next place to get money to start a business.
To connect with an angel investor, you either have to know somebody who knows somebody, get on Shark Tank, or – more likely – contact an investor network. Here are just a few organizations that serve as a matchmaker between angel investors and business ventures they might invest in:
You can expect angel investors to be professionally skeptical and to take a good deal of convincing. You’ll want to fine tune your business plan and be ready to make a convincing pitch to a knowledgeable audience.
5. Venture Capital
Venture Capital (VC) firms invest in new enterprises in exchange for an equity stake in the business. A VC investment will provide your business with capital, but the firm will be a part owner of your business and will have a say in the way it’s managed. That arrangement works for many startups, but you’ll have to decide whether that dilution of your control works for you.
You may have to pay some attention to the structure of your business before approaching a Venture Capital firm. Limited liability companies (LLC) and S corporations are increasingly popular ways of creating a business entity, but many venture capitalists still prefer to invest in corporations, specifically C corporations.
Why would that be? Many VCs are organized as partnerships or LLCs, which are not allowed to own S Corporation shares. The S Corporation structure is designed for small businesses and has useful features for startups. Venture Capital investors may invest in small businesses, but they want those businesses to become bigger so they can sell their shares at a profit. S Corporations can only have up to 100 shareholders, and VCs don’t want to see that kind of limitation on growth. The C Corporation structure can accommodate more growth.
As with angel investors, your pitch to a VC firm has to be on point. These individuals and firms see hundreds if not thousands of pitches for new businesses every year and pick a handful to back. Be prepared.
Finding Your Own Path
This business is your dream. You’ve done your homework and have found a product or service that is in demand. There are many ways to finance that dream. Know that you have options. You might not have realized the resources available to you as you begin this new venture. You don’t have to pick just one. Most businesses use several funding sources to get off the ground.
Whatever the dream, you can get money to start that business. There are funding sources out there to take advantage of. It will take initiative, creativity, and persistence, and you may have to deal with some missteps and rejections along the way. Keep believing, refine your ideas, and don’t quit!