Getting a business off the ground is almost impossible if you don’t know where and how to get funding. You may have written a business plan, done your market research, and discovered everything you need to know to start your business, but without some cash in the bank, getting up and running can be a real challenge.
Here are six options to consider to get your business off the ground:
1. Credit card financing
Business credit cards will almost always have a personal guarantee, meaning you’ll have to put up your own assets -- such as your car or house -- as collateral. Ideally, try to get a true business credit card instead of a personal one. This will start you off right and help you build the good habit of not mixing business and personal expenses.
If you are working with a partner, be sure to understand the implication of having a partner join the business. They may also be required to give personal guarantee on the business credit card.
As you reach out to banks to explore business credit card options, start with your local banks first. Local banks are often more invested in the community and can do more to help you establish credit for your business.
2. Small-business bank loans
There are two primary options you can explore when you start looking for a bank loan for your business: SBA loans and traditional bank loans.
First, try SBA-guaranteed loans. These loans aren’t actually issued by the SBA -- they’re still issued by your local bank -- but they’re guaranteed by the SBA which reduces the risk for your bank.
Unfortunately, SBA-backed loans have restrictions as to what kind of business they will fund, and what the funding can be used for. Your business must be of a certain size and the loan can only be used for certain things. Also, the SBA won’t guarantee loans for certain types of businesses such as lending businesses, speculating, passive investment, pyramid sales and gambling, Check out this list of the most active SBA lenders and also talk to your local banks about SBA-backed loans.
Another option is a traditional bank loan. If you can’t get an SBA loan or don’t want to jump through all the hoops that the SBA requires, try approaching a bank for a traditional small-business loan.
Unfortunately, if your business has not opened its doors, you will have a hard time getting a traditional bank loan. Your approval will most likely come down to a personal credit check and your willingness to put personal assets on the line. If your personal credit history is less than stellar, then you will most likely not be able to get a small-business loan until you build some stability and financial history for your company. This takes a minimum of two years, so it may not be a great option for most people.
As with credit cards, going to local community banks will result in a better chance of actually getting a loan. The big banks will look at you only as a financial risk number, and not as a person bringing value to the community. Community banks tend to be more invested in their community and may be able to find a loan product that works for you and them.
3. Municipal economic development loans
As cities -- particularly smaller ones -- move out of the Great Recession, they are spending more time and resources trying to support local entrepreneurship. You might want to look up your local economic development office and meet with someone to see if there are any loan programs available through your city or county. Sometimes cities can be involved in building loans and will even help you lease a space and improve it.
They can also help identify grants or other government related funding products that your particular business may qualify for. The SBA has a good list of local economic development agencies and you should also consider contacting your local chamber of commerce.
There are many, many misconceptions about what crowdfunding actually is. While there are a few ways to actually get a crowd-sourced “investment” into your business -- meaning you actually sell part of your business to investors -- for the most part, the type of crowdfunding that is legal is basically “pre-selling” products and service through websites like Kickstarter and Indigogo.
These sites allow you to raise money for a specific project or a product that you are trying to bring to market. Instead of getting a true investment in your business, these platforms allow you to collect money from customers who are pre-ordering your product, or accept donations for your business in exchange for special rewards such as T-shirts, posters, special access to your business, and so on.
The most important thing to keep in mind is that you are not getting actual investors in your company. Instead, you are promising to deliver your product or service and deliver rewards to your backers.
Another important thing to realize is that these services won’t deliver your funds to you if you don’t reach your funding goal. So, if you set a funding goal of $20,000 but only get $15,000 of pledges, you won’t get the money. Instead, the pledges will be returned to your potential backers.
If you do go this route, make sure that you understand that, the moment you get money, you have a customer who expects something from you.
I would suggest this sort of funding for a company that needs to manufacture product and already knows a lot about the costs of building the product. You should also have a solid market and strategy to sell.
Finally, it’s not as easy as just launching a campaign and sitting back to let KickStarter or Indiegogo do the promotion work. You will have to promote the heck out of the campaign in order to reach your goal.
Also known as “accounts receivable financing,” this type of funding will only work for you if you have orders from customers on your books. Factoring is an expensive way to get money, but sometimes the fastest option for a business that needs cash quickly.
Essentially, a lender will look at the invoices that you have been able to issue to your customers and then lend you money based on the value of those invoices.
If you are going to use a factoring-type service, make sure you understand the high costs involved, and make sure you make a strategic plan that will relieve you from this sort of funding in the future. This should be a last resort, and not used often, as factoring can be extraordinarily expensive.
6. Friends and family
Raising money from friends and family is one of the most popular ways to raise money for a small business.
The key with friends and family financing is to make sure that you make these loans and investments as formal as possible. Instead of doing a deal with a handshake, make sure all of the terms of the investment or loan are documented and agreed-upon.
While it may seem overkill to use formal documentation with Aunt Sally, it can save you a lot of heartache down the road if things don’t go as planned, or if your understanding of the terms of the loan differs from that of your family member or friend. Getting the terms of the business deal on paper and getting everyone to agree formally can save future family events and holidays.
Funding a business is always challenging. But thankfully, there are more and more options available to budding entrepreneurs. If you’ve found a creative way to raise money for your business, please let me know in the comments.
This article by Noah Parsons is brought to you as the part of a SmartBrief and Bplans partnership. Over the next few weeks, we’ll be bringing you articles to help you start and grow your business. Interested in learning more about lean planning? You can find the “Lean Planning 101” guide on the LivePlan blog.