Startup Money for Small Business: 5 Places to Find Funding

PointofSale.com Owner hanging opening soon sign Startup Money for Small Business

 

In business, you need money to make money. However, when you’re first starting, it’s not always easy to find an eager hand willing to provide the funding you need to get your company off the ground.

Nonetheless, according to the U.S. Small Business Administration (SBA), there are 28.8 million small businesses in the United States, so while it may not be easy to find startup money for a small business, it’s certainly not impossible — and you’ve got some pretty good company.

There are plenty of small business financing options out there, and we’re going to look at several in this post. Are you ready to dive in?

How Much Money Do You Need to Start Your Business?

Before you start asking for money to fund for your startup business, you’ll need to know exactly how much you’ll need. Calculate the various startup costs by referring to your business plan. You’ll need to tell financing organizations exactly how you intend to use the money they’re loaning out — and how you plan on paying it back.

Depending on what type of business you plan on opening, you’ll need anywhere from a few thousand dollars to upwards of a six digit figure. Be that as it may, you’ll be happy to know that 58 percent of small businesses get started with $25,000 or less. While this is still a good chunk of change, it’s a manageable number and doesn’t put you too far in the red before you even open for business.

1. Small Business Loans

Just like any other type of traditional loan, taking out a small business loan means that you’ll have to pay it all back — plus interest. Although this puts you on the hook to pay back the cash, it also means you keep a full stake in your business.

There’s a multitude of lenders in the small business loan market, each claiming they’re the best fit for your business. Of course, not every loan is right for you, so you’ll want to do as much research as possible to find the one that is truly right for you. To help you get started, let’s take a look at four specific types of small business loans you’ll want to consider.

However, before you approach any of these lenders, you’ll want to have your business plan, credit score, business registrations, and any other documentation at the ready. The qualifiers that will help you stand out as a worthy candidate are a high credit score, assets such as your home or investments, and the presence of an existing customer base that knows your brand. Being able to show financial projections and a roadmap of how you came up with that figure is also essential.

Traditional Bank Loans

National and community banks alike provide loans to highly qualified startups, with probably the lowest interest rates you’ll find. Depending on the economy, you can expect bank loans to have an interest rate of 4 to 10 percent, with long-term monthly payments in very manageable chunks.

You save a lot of money going with a traditional bank loan compared to other loans, but the catch is that it’s hard for most startups to qualify. You have to have an excellent personal credit score (above 700), collateral that you can pledge against the business, possibly a co-signer who is willing to do the same, and some experience in the industry you’re pursuing, just to name a few.

Alternative Lenders

If you’re having trouble qualifying for a bank loan, there are online lenders ready to serve you — but it will probably cost more. While alternate lenders have lower qualifying standards, they offset that risk by imposing sky-high interest rates.

Tread with caution when it comes to alternate lenders because you can get into some major debt if your business can’t cover the cost of paying back the loan. It may be a little too risky for companies that aren’t yet financially stable, which is the case for most startups. Nonetheless, if your business can get off to a lucrative start with the help of the loan, it could be a great catalyst.

SBA Loans

The Small Business Administration (SBA) offers small businesses guarantee programs for loans that are made by qualifying banks, credit unions, and nonprofit lenders. These guarantee programs mean that the SBA guarantees up to 85 percent of the loan, which is an offer that’s hard to refuse.

  • The Standard 7(a) is the SBA’s flagship program with the maximum loan amount of $5 million and best used for working capital.
  • The Small 7(a) is the mini version of the Standard 7(a) loan. The maximum loan amount is $350,000 and typically faster to fund than the standard version.
  • Microloans are for smaller businesses that need up to $50,000 for working capital.
  • The CDC/504 loan program is for business owners looking to build or buy owner-occupied commercial real estate.
  • The Veteran’s Advantage is an SBA loan that is only available to veterans for up to $350,000.

Depending on your specific needs and qualifications, all of the loans mentioned above are possible solutions for your small business funding needs.

PointofSale Couple closing deal with broker Startup Money for Small Business

2. Small Business Grants

As opposed to loans, you have to pay back; you do not have to repay business grants. However, that’s not to say business grants are a zero-risk endeavor. Since government agencies are the biggest distributors of grants, it’s typically a very time-consuming and challenging application process. If you’re looking for fast cash, applying for a grant is probably not the way to go.

However, if you do decide to apply for business grants, start by approaching organizations that offer business grants designated for a group that applies to your demographic or nature of your business. For instance, there are grants awarded specifically to female business owners, eco-friendly businesses, or socially conscious businesses.

3. Crowdfunding

Thanks to technology, crowdfunding is becoming an ideal funding option for startups that already have an audience they can tap into. Crowdfunding is a way to solicit funds from the public via an online campaign, and typically, rewards are given to individuals in exchange for their donation. Often those rewards are in the form of early access to products or free brand merchandise.

If you don’t have much brand awareness yet, crowdfunding probably won’t bring in the cash you need. However, with the power of social media, there are plenty of opportunities to grow your fan base on social networks like YouTube, Twitter, or Facebook. Plus, you don’t need an outstanding credit score or an endless list of other qualifiers to use a crowdfunding platform.

See Also: Point of Sale Providers Can Help Restaurant Owners Access Capital

4. Angel Investors

If you’re having trouble getting a loan, or your business is not yet popular enough for crowdfunding, getting angel investors on board is a possible alternative. However, the catch is that you’ll give up some of your business’ equity in exchange for the cash.

Although you may relinquish some control of your business to the investors, you stand to gain from their connections in the business world and the advice they can offer from previous experience.

5. Personal Financing

If you don’t want to give out equity in your business, but you can’t seem to qualify for a loan or win a grant, you still have the option of personal financing. There are a few different ways to go about this, so let’s take a look at a few options.

Friends and Family

If you can get a personal loan from a friend or family member to start your business, go for it. It’s a fairly common way for new startups to get funding. Also, if you have to pay interest, chances are it’ll be a lot less than what you’ll pay a professional lender.

Home Equity Loan

A home equity business loan is like a lien or second mortgage on your house that you can leverage to finance your business. These loans typically have 5 – 10 year repayment terms, so you pay them off in manageable chunks. However, you do end up paying a lot of money in interest over that term, and if your home’s value declines, you could be forced to refinance, and if you default, you can face foreclosure — losing your business and your home.

Your Savings Account

If you’ve been a savvy saver your whole life, your savings are another financing option. You’re not putting anyone else’s money at risk, you’re not giving up equity in your business, and think of all the money you’re saving by not paying interest on a traditional loan.

Personal Credit Cards

Although personal credit cards won’t offer large lump sums of financing, they could be a great way to kick things off and serve as a revolving source of funding. Nonetheless, keep in mind credit cards usually carry high interest rates, so proceed with caution.

Your Retirement or 401K Plan

Did you know your 401k could finance your business? There are a couple of ways to go about using your 401k for startup funds.

For starters, you can borrow up to $50,000 or half or your vested 401K plan — whichever is lower. Generally, you’ll have to pay off this loan within five years and pay an interest rate between 4 -8 percent. However, because you’re borrowing against your retirement, you’re paying yourself back — plus the interest.

Another option is to cash out or liquidate your 401k completely. This is a good option if you’re near retirement age, but if you’re under 59, you’ll have to pay a penalty fee (around 10 percent) of what you cashed out.

Final Words

Startup money for a small business is always risky from a lenders perspective, but the right financing option can mean the difference between sinking or swimming in the early years of business. You might consider working with a startup consultant to get expert help in finding funding opportunities and applying for them. While this is yet another cost in the early stages, it can pay off. Please educate yourself about every opportunity as much as possible before going for it, and of course, always be sure to read the fine print before you commit to any loan or funding plan.

Disclaimer: The intent of this article is to provide an informational resource. It is not intended to serve as professional financial advice. You should always consult a financial professional or accountant when making any financial decisions for your business.

About the Author

Nicole Sabo

As part of the Editorial team at PointofSale.com, Nicole Sabo brings together relevant content and resources to create a powerful informational platform for site visitors. Nicole graduated Cum Laude from Bloomsburg University of Pennsylvania in 2015 with a B.S.B.A. in Marketing and Management and has experience in the retail and hospitality industries.