Here are nine ways young companies get the capital they need.
Young businesses need money in order to run. Because of their limited track record, though, startup entrepreneurs often struggle to land a bank loan or line up investors. But money is out there. We’re going to look at nine proven sources.
Before we start, a word of caution: Whatever path you choose, don’t expect lenders or investors to hand over money simply because you asked politely. They’ll want to see that you carefully researched and planned your business. That’s why so many want to see a written business plan—especially one that explains how the lenders or investors will get their money back.
Savings or Liquid Assets // This is the single most common method for funding a business. You could rely on personal savings or other assets: stocks, bonds, real estate or a car without a lien. These can either be sold or pledged as collateral to a personal loan.
Family and Friends // This is another successful way for early-stage entrepreneurs to find capital, because loved ones already know and trust the entrepreneur. In most cases, the loan is made for low or no interest.
This is still a real loan, though, and if you fail to repay your loved ones, you’re putting those relationships at stake. Make sure you put together a written agreement. Ideally, you should borrow from someone with a business background—and who understands the risks of lending to you.
Home Equity // Startup entrepreneurs with equity in their home often use that equity to fund their companies. A home equity loan is usually advanced at the time of the loan, and is paid back over 10 to 15 years. Make sure you understand the risk: If you default, you will lose your house.
Retirement Account // In some cases, you can borrow money from your 401(k) or your retirement account, but your retirement plan may place restrictions prohibiting the use of these loans for business purposes. You can withdraw money from your account, but you have to pay taxes on the amount withdrawn. In addition, if you are younger than 59 years old, you also will pay a penalty. This could mean that you only get about 60 percent of the amount you withdraw. If you withdraw money from your retirement account—or even get a loan against your account—this could have a negative effect on your retirement. In general, this is a higher risk than other options.
Bank Loan // If you can qualify and have collateral, you can always apply for a bank loan. However, banks normally do not like to make loans for startup business that have no track record. In some cases, they will make the loan if they can get the guaranty of the SBA. In these cases, you typically need good credit and have some type of collateral that you can pledge against the loan. It could be a car without any lien, equity in real estate or liquid assets such as stocks and bonds. There are different types of SBA-guaranteed loans that can be used, but this is something that your banker can explain in more detail.
Microloans // Microloans are a possibility for small businesses that can’t yet qualify for lending through traditional banks. Kansas City has a handful of microloan programs.
The standards for microloans usually aren’t as strict. These loans are for less than $50,000 and usually average around $8,000. The interest rates are slightly higher, though, because of the higher risk.
Business Credit Cards // It’s another option, but one that should be taken seriously because they usually come with a higher interest rate. If you don’t keep up with your monthly payments and retire this debt as quickly as possible, it can be the start of serious money woes.
Crowdfunding // If you’ve ever used Kickstarter, Indiegogo or Wefunder, you’ve participated in crowdfunding. That’s where a huge group of people each chip in a small amount of money to fund a big goal—like your new business.
If you go this route, make sure you understand how your crowdfunding platform operates. Each of them have slightly different rules and fees. Most crowdfunding projects are based on donations, not investments—though federal rules have been updated to allow equity crowdfunding in certain cases. Make sure you know which one your project is.
The most successful crowdfunding campaigns give their supporters some sort of incentive or gift, like a T-shirt or early access to a company’s product.
Angel Investor // An “angel” is someone (or a group of someones, typically established entrepreneurs or others with high net worth) who put money into an early-stage company in exchange for partial ownership. This is a very rare option, one that most new businesses won’t qualify for.