Financing a startup is no easy undertaking. According to the U.S. Small Business Administration, the average amount of capital needed can range anywhere between $10,000 to $80,000 yearly. Where can a brand-new business turn to receive this kind of funding, especially when they lack the credit that established companies have?
The great news is that even if you factor in your startup and its financing needs, there are plenty of borrowing options available. Let’s take a look at the best financing options for small businesses and decide and whether or not they may be a fit for your startup.
1. Funds from family, friends, and self.
In 2013, Small Business Trends reported that 82% of startup funds come from family, friends, or the entrepreneur himself or herself, with 77% of small businesses using their personal savings to finance their companies.
Believe it or not, personal savings and financing from friends and family is actually one of the most common sources of startup dollars, and can be one of the best financing options for a business. However, for as much as they may be willing to support you, financing through relatives should be handled with care. Rather than frequently request money from the same people, branch out beyond your immediate inner circle. Look into funding options from acquaintances or anyone else who might in interested in what your startup is doing. Make sure to have a solid business plan put together before approaching your family and friends for financing - you'll be much more likely to get funding if you're able to convince your investors that you know what you're doing, and can explain what benefits they'll get by investing.
2. Credit cards and personal loans.
Small businesses (and individuals) may be taught to shy away from taking on credit card or loan debt, but external debt plays a big role in benefitting young startups. According to the SBA, entrepreneurs receive three-quarters of small business funding from banks in the form of credit cards and personal loans. Entrepreneurs that already have retirement funds set aside may even able to borrow money from that account to pay back on a loan!
While credit cards may only account for 7% of all startup capital (reported by the SBA in 2013), don’t knock them as a source of unsecured debt. Neil Gottlieb, Founding Twin at Three Twins Ice Cream, was recently profiled in Entrepreneur Magazine where he credited this source of funding for keeping the business going during an economic downturn. His advice for using credit cards is simple: pay the balance in full each month and be thankful that they’re available to have and use for startups. While these financing options aren't always the best for a new startup, they can be a great option for helping to cover unexpected expenses during your first few years.
3. Small business loans.
Another financing option is to apply for a small business loan or grant available through the government. The SBA, for example, offers loans through commercial lenders. While these are not direct loans, they do work with lenders to reduce lenders’ risk and provide a partial guarantee for loans. Ultimately though, it’s important that entrepreneurs do their research to apply for the loans that are the best fit for their business. To help you get approved for a small business loan, consider using an online lending marketplace to help speed up the process.
Earlier, I mentioned reaching out to interested individuals outside of your inner circle as possible investors. By working alongside a partner, you’ll have the peace of mind in knowing that you’re working with an experienced professional and be a much more attractive candidate to banks or other financing entities that you may want to borrow money from for your startup. Again, you'll want to have a solid business plan put together before approaching a partner for funding.
5. Angel investors and venture capitalists.
We saved the best financing option for last, mostly because angel investors and venture capitalists tend to be a bit more specific as a funding option. Angel investors invest their wealth into a business (typically to the tune of $25,000 to $100,000 per company) and request equity in return. Venture capitalists invest in high-growth companies, like apps and software startups, and are provided shares in the company or an equity position that allows the VC to be active in the startup. If your business already has a proven business concept or a record of success and need more money to grow, these two options are some of the best ways to get large sums of financing quickly.
Ultimately, deciding which financing option is best for your startup is a decision that will require you to spend some time thinking about your company’s past, present, and future. Regardless of whether you’re pitching to an investor or family member, make sure that you can thoroughly explain the idea behind your startup and business plan. This gives each individual a glimpse into the future of your startup and the valuable role that they can play within its success.
About the author
Deborah Sweeney is the CEO of MyCorporation.com, which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation and Deborah at @deborahsweeney.