If you are thinking of founding the next unicorn start-up, but you lack the initial money to get your idea running, there are several ways to get up to speed, from traditional bank loans to asking family and friends for support or hoping to be noticed by an angel investor. We will discuss the pros and cons of the most common ways of getting together the funds.
Investing your own money
Ideally, if you have any savings you could use them to start a business, but to avoid tapping into the emergency funds, you could try re-routing your retirement money. If you have already contributed to a 401(k) or a Traditional IRA more than $50.000, consider asking for a ROBS (Rollover for Business Startups). This is, in fact, a loophole in the IRS’s policy and should be treated with caution since, in the case of a failure, you do not only lose your business but your funds for a happy retirement.
Your home could also serve as equity if you already own more than 20-30% of it and have a good credit score (650+ FICO score). For such a promising borrower, usually the APR is low (less than 8-9%), but the risk in case of default is high, you are jeopardizing home-ownership.
People who believe in you
Many entrepreneurs start by borrowing funds from their friends or relatives, as this way they can save more on the interest. Most likely they will not ask you for your FICO score, but it is still necessary to draw a legal contract stating the repayment term, interest rate, and default penalties. If your lender accepts you could give them shares in the company and repay their contribution by dividends when you start generating profit.
Crowdfunding is becoming an increasingly popular method of raising money to start a business. If you have a product that you think will appeal to the masses, you should try this option, as it gives you the money and an initial set of clients and product enthusiasts. The best thing: you do not have a debt to pay, but if you are going for an all-in type of campaign, if you do not reach your goal, the work is in vain.
When you only need a small amount to cover some initial marketing expenses or get some raw materials, a new business credit card can get the business off the ground, as long as you repay at least the minimum amounts. This option is worth considering only by people with excellent credit score so that the interest is not an unnecessary business expense. Sometimes you can get as low as 0% APR in the first year or for a couple of months.
A credit score in the medium range (500-650) will not qualify you for a credit card, but you can still get micro-financing, which means $50K for operating a business and $10K for start-ups. Due to less than perfect score, most of the times you will be asked to bring in a co-signer and proof of financing.
If you are looking for serious funding, you should access specialized instruments, such as SBA loans and Equipment Financing. An SBA is a loan going up to $5M for business owners who have proven they know how to manage finances by having +680 FICO scores, more than two years in a profitable business, a down payment of at least 10% and in the best-case scenario a collateral too. Start-ups have a particular line, but the whole process to qualify is tough and takes at least three months, but the APR is low.
If you need the money to buy expensive equipment that doesn’t need constant upgrading, there is a specific type of loan, the equipment financing. Depending on your situation, you will pay between 5-30% APR, but don’t need any upfront payment or a co-signer.
Also see our partnered online business loan lenders here.
There is a slight difference between angel investors and venture capitalists. The angels are more interested in the potential of the idea, even if that means the long run, while the latter aim for fast ROI. Usually, you must get noticed with a million-dollar idea. These options are not for your next coffee shop or pizza house; you would better be the next Facebook. Be ready to give up some equity, usually less in the case of angels and more for VC, even give up even some principles and embrace a specialized management team. If you have co—founders agree on the way the company will be split after the capital infusion.
Ready for business?
As you can see, not having the money is not an excuse to avoid pursuing your dream of being an entrepreneur. However, being diligent and excellent with creating and managing a budget will get you far in business and keep you away from debt. Here is an infographic to help you remember the ways you can get money as an entrepreneur.