Starting a business goes beyond hard work and a positive mindset. The true make-or-break often comes down to cost. You must have the financial capital to launch your business and keep the operations going on a long-term basis. Many new businesses fail because they don’t have enough financing, especially during the pivotal first few months.
Business financing can come from a singular source or several lenders. A well-suited financing agreement ensures your small business has what it needs to pay employees, be operational, and generate revenues. In the long term, it will become the company’s responsibility to turn the revenue into a sustainable profit.
For any aspiring entrepreneurs, here is a guide on how you can finance your own business:
1. Your Own Money
Many of us have savings, a sum of money that we accumulated throughout the course of our lives. Starting a small business can take lots and lots of funding. Although you may need more than what you have available, this is a good place to look. However, using your own money puts you in a high-risk financial spot. As such, you may want to consider financing alternatives.
2. Home Equity Line Of Credit
A home equity line of credit taps into what you’ve paid into your mortgage. If you have a minimum of 20% equity, this is a highly recommended area to focus on. The interest rates are exceptionally low as the collateral is so high in value. You will be borrowing against yourself essentially.
The HELOC is a smart way to fund a small business. It will cost you less in interest than any alternative lending source or credit card will. Ultimately, a home equity line of credit is flexible, has lower fees, and minimizes the need for a high credit score. Plus, it lets you use the money as you please, which isn’t always the case with business loans and the usual gamut of small business financing.
3. Business Loan
Banks know how difficult it is to get started or expand a small business. If you need business financing, banks are there to help because they see the potential upside. A business loan does require you to have fairly good credit, collateral, and a solid, data-driven business plan with projections on income and expenses mapped out.
4. Liquidate Assets
All of us have assets, like real estate, vehicles, instruments, collectibles, jewelry, and furniture we no longer use. Although selling these is only a one-time boost, it is a way to gather additional savings. Anything that you can sell and offload, even if it’s only for very little money, can be a financial boost. This shows you are doing everything within your power to finance your own business, which is something that many lenders appreciate.
5. Loan from Friends or Family
A lot of self-made small business owners got their start taking financial assistance from family or friends. A loan from someone in your circle of acquaintances can mean a lower interest rate, more favorable terms for you, and does have its advantages.
If there’s any issue with repaying the loan though, you do jeopardize that relationship. If you do go down this route, address the potential for loan failure from the get-go. Consider what your course of action will be if you fail to repay the loan.
6. Credit Card
Credit cards are a natural place to spend money you don’t have. The downside with credit is that interest rates are absurdly high. You will end up paying thousands to launch a business if you finance it with credit cards. That’s money better spent on other areas of your business. Unless you are desperate, credit cards aren’t exactly where you want to turn.
7. Credit Union
There are some credit unions that offer business loans if, for whatever reason, you don’t want to go through a bank. The terms are comparable, both in what’s required to obtain one as well as interest rates and repayment options. It is just another source of funding for your own business available that certainly deserves a mention.
8. Personal Loan
If your credit is in decent shape, a personal loan (such as a line of credit) is a low-interest loan that you can use as you see fit to help launch your start-up. Unfortunately, not all of us have credit scores that would qualify us for as much as we’d need to launch a business.
Even so, the interest is favorable and that’s the important part. The less fees you pay, the better. If your credit isn’t above-average or even average, your next step is to look into utilizing what you’ve put into your mortgage.
9. Financial Partner
You can also go through a private lender if you like, trading away things like business equity in favor of financing Shark Tank-style. Why we don’t recommend this typically is because it really should be a last resort.
Seeking out investors commits you to repayment plans or ownership divides that aren’t always fair. This partnership could end up costing you thousands in the long run depending on the terms.
