You have a dream. Whether it is to open a new restaurant, revolutionize the mobile payment industry or start your own music label, at some point you will need funding for your startup business. When the time comes to buy equipment, make a deposit on a lease, or have money for payroll, what will you do? In addition to the things you should remember when starting a business, there are a variety of ways to finance your startup business, and you should consider all of the startup financing options before you take the next step toward realizing your dream.
Funding Your Startup Business
Often entrepreneurs only think of borrowing money from a bank to get their new business off the ground, but there are many alternatives that should be researched first. It is important to understand the pros and cons of each.
Unsecured and Secured Loans
If you consider yourself a startup, but have been in business for at least 6 months, there are startup business loan options like merchant cash advance and bank statement financing that may be appropriate for you. If you have not yet opened the doors, or if you have been operating less than six months, then a startup business loan will be on your personal credit. An unsecured startup loan is a personal loan that can be used for financing a startup.
This may be surprising, but the primary way that people finance a new business is through self-financing. You may think that you don’t have that kind of cash lying around the house, but have you thought about all of the assets you do have on hand? Here are just a few of the ways people have launched their new businesses for years using personal assets in creative ways:
- Investments – if you have investments in stocks that are traded on the major exchanges, you could sell some of them for cash or you could obtain a low-interest-margin business loan secured by your stocks. The risk in this would be that if the market price of the stocks should fall, you could get a margin call to put up more collateral.
- 401(k) – if you have a 401(k) plan with your current employer, you may be able to take a low interest loan against your vested balance. This startup financing option only works if you plan to keep your job, because if you were to leave or lose your job, you generally have to pay back the loan very quickly, often within two months.
- Life Insurance – if you have permanent, or cash value, insurance you can use the value that you have accrued as a source of funding. Generally, you take a loan at low interest rates, and if you can’t make payments that startup business loan is deducted from the value of your insurance should you pass away.
If you are buying a franchise, there are loans and lenders that specialize in franchise start up loans. Many commercial banks will loan to someone to open a brand name franchise provided the prospective owner has good personal credit. The SBA (Small Business Administration) also backs franchise start up loans. Some franchisers also offer their own franchise start up loans, so make sure to do research there first before looking into other financing options.
Private Investors and Venture Capital
Venture capital and angel investors – to the new entrepreneur they often sound like the easy way to fund your startup business. The reality is that venture capital is not easy to obtain. The hardest part is getting yourself in front of the right people. However, once you get that face to face, you still need to convince them that there is a huge potential upside to their investment. Typically, they will look for ideas that will disrupt an industry, something new and fresh especially in technology or science, and they will want to know that the company might one day go public.