If you dream of owning a small business but aren't sure where to get startup money, the good news is there are quite a few options available to you. The first step is deciding which funding path is the right one for you and your business's needs.
Here's our list of six savvy ways to fund your small business venture. The one that works best for you will depend on various factors. Be sure to explore the advantages and disadvantages of each option and have a solid business plan and repayment strategy in place for minimal risk to your financial well-being.
1. Business Loan
Small business loans from the bank are the most common and traditional sources of funding for new businesses. To qualify for a bank loan, you must have a good business credit score and a strong business plan that thoroughly explains your business and includes expense estimates.
Depending on how much you borrow, you may have to secure the loan with collateral such as real estate or equipment. If your business doesn't have enough assets to leverage against the loan, you may need to put up personal assets, such as your home.
Bank loans are desirable because interest rates are often lower than other options. However, not everyone qualifies for a bank loan; thousands of applicants are denied every year. Carefully research the lending requirements and interest rates of several banks before you apply for a better chance of success.
2. Borrow from Yourself
Taking money from your own savings account or 401(k) is another way to fund your business venture. If you have the funds in a savings account, this is probably your most cost-effective option since you won't have to pay yourself interest on the money.
However, you need to consider whether the tax penalty you're going to incur for taking money out of your retirement fund early is worth it. Typically, you can expect your fund administrator to deduct 20 percent to cover taxes and an additional 10 percent as an early-withdrawal penalty. No matter what type of funding option you choose, you want to carefully assess the risk and viability of your business plan to minimize the chances of losing your hard-earned savings.
3. SBA Loans
SBA loans are backed by the U.S. Small Business Administration and funded through banks across the country as well as other lenders such as SmartBiz. Several kinds of SBA loans are available, with each designed for a specific purpose. The most common loan it grants is the7(a) general small business loans, which can be used to start or expand a business. Before applying for a SBA loan, make sure to research loan types, eligibility requirements and repayment terms to find the loan that best meets your business's needs, and to better your chances of being approved.
4. Alternative Business Loan
If you don't qualify for a bank or SBA loan, an alternative small business loan from an online lending platform like Kabbage or OnDeck may be a good option, particularly if you need money quickly or if you don't have a good credit score. Though interest rates are higher than the industry average, alternative business loans have relaxed lending requirements. Some only require you to have been in business for one year and that your company earns at least $50,000 annually. The application process is usually 100 percent online and applicants may receive an answer back the same day they apply, sometimes within minutes.
5. Peer-to-Peer Lending
Instead of borrowing money from a bank or alternative lender, many business owners are turning to peer-to-peer lending. Peer-to-peer resources include companies like Lending Club, Prosper and Upstart. These platforms match businesses with a lender or group of lenders through their online platforms. Most require you to have good credit, and although the loan amounts you receive are similar to what you would receive from a bank, interest rates are higher than conventional bank loans. Additionally, you may be required to personally fund a portion of the loan. However, if you have good credit and a compelling business proposal, this type of loan may be a good option to consider.
Crowdfunding is a unique way to raise funds for your business. Rather than borrowing money that you pay back with interest, crowdfunding platforms like Kickstarter or Indiegogo let you raise money that you won't need to repay. However, businesses usually offer incentive items, such as products, stocks or equity in your business to those who donate to their cause. Although not having to repay crowdsourced funds makes this an enticing option, there's no guarantee that anyone will donate to your cause or that you'll be able to source enough money to reach your goal.
The funding option that will be best for your business depends on your small business venture, its needs and what you qualify for. Explore all of these options and consider talking to funding experts before committing to borrowing money. If you need more information on lending or other financial topics for small businesses, check out our financial articles.