Funding a Startup: Startup Business Loans Explained
Top 7 Business Startup Options
What is a startup business loan?
Do i qualify for a startup business loan?
How do i apply?
Funding options for startups? Do they really exist?
If a business has been up and running for over 5 years, they have multiple options to secure capital for the business, especially considering that alternative lending industry has grown significantly in the last ten years. But what about startups? Where can startups turn for funding?
Now when we say ‘startup’, we don’t mean the next billion-dollar company coming out of Silicon Valley, we mean the next local business. The dry cleaner, the restaurant, the mechanic, the yoga studio, the home-based internet business, even the new college graduate looking to launch a new dentist practice.
With over 600,000* new businesses created each year in the United States, lack of capital is one of the main reasons why business fail**. Appreciating how critical capital is, we have put together a comprehensive list of how a startup business owner can get access to the much-needed funds required to launch and growth their business.
By The Numbers: Qualification, Rates and Fees
|Friends & Family||Startup SBA Loans||Business Credit Cards||Crowdfunding||401k Rollover||Equipment Finance||Angel Investors|
|Funding Range||$0- $500,000||$25,000- $350,000||$5,000- $150,000||$5,000-$500,000||$50,000- $300,000||$10,000- $150,000||$50,000- $2m|
|Flexibility of Funds||No Restrictions||Approved Expenses Only||No Restrictions||No Restrictions||Minimal Legal Restrictions||Specific Equipment Only||Approved Annual Budget|
|Time To Fund||< 30 Days||3-6 months||5-30 Days||30-120 Days||30-90 Days||30-90 Days||3-6 months|
|Required Docs||Business Plan||Business Plan, Financial Projections, P&L, Balance Sheet, Personal Financial Statement||Business Registration Docs: EIN + Articles of Association||Business Plan, Video Sales Pitch, Business Registration Docs||Business Plan, Financial Projections, P&L, Balance Sheet, Personal Financial Statement||Bank Statements, Financial Projections, Balance Sheet, Approved Purchase Order||Business Plan, Financial Projections, P&L, Balance Sheet, Personal Financial Statement|
|Time in Business Required||0 Days||> 6 months||0 Days||0 Days||0 Days||> 6 months||0 Days but usually > 6 months|
|Owner Contribution||$0 Required||20-30%||$0||$0||100$||> 20%||$0|
|Ratese||10%-30% APR or 5-30% Equity||6-10% APR||0% Intro Rate for 12-18 months. 9-25% APR thereafter||8-10%||~$140/ month account fee||10-40% APR||Equity in Business, usually 20-60%|
Our Ratings: Ranking Qualification, Rates and Fees
|Friends & Family||Startup SBA Loans||Business Credit Cards||Crowdfunding||401k Rollover||Equipment Finance||Angel Investors|
|Flexibility of Funds|
|Time To Fund|
|Time in Business Required|
Top 7 Options for Start Up Business Loans
1. Friends and Family
Believe it or not, turning to friends and family is one of the most common methods for funding a startup business. Whereas financial institutions may not feel comfortable investing in your business, the people that are closest to you - your friends and family - might be more willing to roll the dice on you. The largest difference here is that these are people who know YOU, they are willing to invest in YOU. A bank on the other hand only looks at the hard numbers and as a startup, those simple don’t exist. Your friends and family will assess you, your character, your passion. They see first-hand how committed you are to your business, how excited you are, the late nights you put in and all the other sacrifices you are willing to make to ensure your business is successful. Remember, they are putting their faith in YOU more than your business idea.
‘Friends and Family’ may sound formal and cliché, but it truly is one of the most common sources of startup funding and it can come in many forms. It could be in the form of a blank check, free rent of some spare office or garage space, free tables and chairs, a loan or any number of other means.
One benefit of getting startup funding from friends or family is that there is an actual chance it will work and you will get some capital. After all, if your friends and family don’t believe in you and your business, who will?
Another benefit of getting startup loans from your inner-circle is that the investors will become interested in your business. If your friends or family members have business experience, this can be very valuable as you will not only get funding but also advice on how to succeed and potentially introduce you to other people who can lend or invest.
While there are a few benefits of going to friends and family for money, you must still be very cautious when doing so. Be sure to maintain proper boundaries and expectations. It’s always best to treat this aspect of your relationship as you would with any other lender or investor. First step is once everything has been agreed to, be sure to put it into writing and bother parties sign it. The purpose of a good agreement is to formalize what was agreed to, put it in writing and store it in a safe place with the hope of never having to look at it. The advantage of this is if, in the future, there is a dispute, both of you can go back and reference the agreement of what was actually agreed upon. There are multiple online services such as Legal Zoom that can provide the necessary forms to ensure it is both legally binding and not too expensive.
Like any other financial decision, make sure both parties understand and agree to the terms so both parties on the same page from day 1. Good communication is the simplest way to avoid conflict. Be sure they understand both the risks and the rewards, and everyone’s interests and expectations will be aligned.
So how do you ‘qualify’ for Friends and Family funding?
This is quite subjective, but here are a few pointers on what you should have:
You Commitment- People want to know what you as the entrepreneur are willing to commit. That could be your own money that is going in, if you are leaving a well-paying job to focus on the business or selling a car. It goes a long way to a potential investor to show them that you are willing to make some kind of sacrifice and are willing to commit something big!
Business Plan- It doesn’t need to be a 50-page document, but it does need to spell out the basics:
- What your business is
- What makes you unique
- Why you will be successful
- Your growth plans
- SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats)
Budget- have a 3-year budget broken down by month showing where you will spend money, where your income will come from. This will be a great exercise for yourself but will also be very powerful for your friends and family to understand how their money will be used
The Ask- Be specific in how much you are asking for and exactly what it will be used for
2. SBA Loans
When it comes to the SBA, there is a lot of rumors, stories, misconceptions and even a little truth out there.
To start with, who is the SBA? The SBA stands for the Small Business Administration. The SBA is a US government agency that provides support for entrepreneurs and small businesses. SBA loans are made through banks, credit unions and other lenders who partner with the SBA. The SBA provides a government-backed guarantee on part of the loan.
How does it work? At the simplest level, the SBA says to their approved lenders that if they provide a loan under a pre-set of conditions, they will guarantee a certain percent of the loan in case of default. That means the lender is guaranteed, not the entrepreneur. Because the SBA is guaranteeing the loan, they require the loan to be low risk. They will look at requirements from the entrepreneur such as; personal investment, years of industry experience, time in business, business plan, financial forecasting. They want to ensure they are truly lending to businesses that have a proven track record and the ability to continue to grow and repay the loan.
According to the SBA, when you use the microloan program you can qualify for up to $50,000. The SBA has a lending program known as 7(a), which can also be used to start businesses. The SBA website states that: “7(a) loans have a maximum loan amount of $5 million. SBA does not set a minimum loan amount. The average 7(a) loan amount in fiscal year 2015 was $371,628.”
The challenge with the SBA loans is that in order to qualify the SBA usually requires collateral or a 20% capital contribution. Meaning, for every $1 the business owner borrows, they must be able to contribute $0.20. In other words, the SBA says if you want to borrow $100,000, they want to see the startup owner contribute $20,000 of their own startup capital. This can be very difficult for some new business owners. In startup business funding, there is no one size fits all.
SBA startup loans have very strict qualification criteria as the federal government will ultimately be insuring them. For this reason, there is a large amount of due diligence that the lender will do, they have an extensive application process and very specific documents required. The application process is very thorough and obviously no guarantees of approval. With that said, for the right business with the suitable criteria, the SBA route may be ideal as their rates are typically very competitive and they provide long terms to ensure the monthly repayment is extremely manageable to the startup business owner.
While not a perfect fit for all business owners, if your business does meet the criteria, you can make the capital contribution and are patient enough to go through the process, SBA loans maybe the idea funding choice for your startup business. Funding in a timely manner is usually integral to the survival of your business.
WANT TO KNOW WHAT YOU ARE ELIGIBLE FOR?Speak to a Funding Advisor/ Free Consultation GET STARTED
3. Business Credit Cards
While most people don’t immediately think of credit cards as a way to get startup business loan, it is actually one of the most common ways for new businesses to get off the ground. Now before you scroll past this section, take a moment to read, you may be pleasantly surprised with a few of our tips. We’ll also share a few interesting statistics from the 2011 US Census and the Small Business Association (SBA).
Of all US based small businesses, 80% use credit cards to provide working capital while 60% of businesses use business credit cards. That means a lot of business owners are still using their non-business, standard, credit cards for their business. Our view is that this works well if you have a card specifically assigned for business or keep great records. It is generally recommended to avoid having the same card being used for your business and your personal expenses.
Credit cards are one of the fastest and easiest methods to access capital. Each bank has their own criteria but as a good rule of thumb, they are looking for credit scores of 680+ for FICO8 and to have a current credit card with a credit limit of $5,000 that you have had for a minimum of 3 years.
Credit cards operate in the same manner as an unsecured line of credit, meaning, you can use the funds, pay back and then draw down again and continue to repay and draw down. For this reason, credit cards are ideal for expenses that are monthly expenses such as inventory, rent and other frequent bills. They provide the business owner the ability to make the payments for their regular expenses, enjoy the payment terms, typically net 30 and if need be, carry a balance. So think of it like this, let’s say you purchase $10,000 worth of inventory on your credit card, you will usually have monthly net 15 on monthly net 30 terms on that. This now gives you the ability to purchase the inventory, put it on the shelves, sell the inventory for let’s say $15,000 and make the payment for the inventory all after you have already sold it. This gives you the ability to actually not come out of pocket a penny for that inventory. Now this is a nice way to run a business!
Beyond just the payment terms, earning a huge amount of rewards from your business that you can use for your business or personal life has mass appeal. In fact, we recommend that you try to run every single transaction through the credit card to earn the points. It is quite easy in a business sense to earn enough points to get a FREE annual vacation for yourself and your family.
Before jumping in blind with a random business credit card, it’s important to understand which the best match for you is, your requirements and your eligibility. There is a large selection of different types of credit cards and each business owner has their own unique requirements and advantages/ disadvantages.
There is one more major tip that we have to share: Don’t think you have to be limited to just one business credit card, in fact, the majority of small business owners have multiple business credit cards.
Multiple cards? Why?
Great question! There are several reasons why you might want to have multiple business credit cards:
1. Access to Additional Capital- If you receive a $10,000 limit business credit card, that simply may not be enough for your business needs. If that’s the case, a second or third card may be beneficial to fully utilize the credit line
2. Maximize Cash Flow- As a startup business, you will have both one-time, initial setup costs as well as ongoing monthly costs. With some business credit cards providing 0% interest for the first 9 or 12 months, many business owners will actually place a major purchase on that card and pay it down each month. For example, if you buy a $12,000 piece of machinery on a credit card that has 0% for the first 12 months, you are able to pay $1,000 per month, have a full year to pay for it and never pay a penny in interest. Not a bad deal at all! From there, a second or third card can be used for monthly expenses that you pay for each month and repay in full or partially each month
3. Maximize Rewards- Each credit card has a different rewards program and if you are willing to be mindful, you can actually increase your benefits quite a bit by having multiple credit cards and using the right credit card at the right time.
As a simple example, if you travel a lot, if you use an airline credit card such as the Delta Business Amex or the Citi AAdvantage. If you book all your flights through that card, you will get to enjoy multiple benefits such as increased airline status, bonus miles based on preferred status, free luggage, priority boarding, exclusive airport lounge access, free on board food, all because you spent the same money you would have spent but you used it on the most suitable credit card.
Oh, and let’s not forget all the airline miles that you’ll accumulate that you can get free flights. To provide some context, an average return, cross country flight is around 40,000 miles. If you spend $10,000 per month for 4 months, you just got a free trip across the country, not bad for spending the money you were already going to spend.
Next would be a hotel credit card such as Hilton Amex, SPG Amex, Hyatt CARD or the Marriot CARD. Very similar to the airline credit cards, if you pay for all your hotel visits on this type of card, you will get free room upgrades, elite status, bonus miles, free meals and a slew of other benefits.
The next major category is cash back cards. There is the standard cash back whereby you’ll receive 1% or 1.5% back of everything you spend. Meaning, if you spend that same $10,000 per month, you’ll actually receive $100 per month as cash back. You can use that as either a statement credit or you can just have a check sent and use it for whatever you want, no questions asked. This is pretty good, but where it gets exciting is the bonus categories. Many of the cash back credit cards have what are commonly known as ‘bonus categories’. This is where they have specific categories where you receive bonus cash back. As a perfect example, the SimplyCash Plus Business Credit Card from American Express provides 1% cash back on most purchases but they give a huge 3% cashback on the following categories: Airfare purchased direct from the airlines, Hotel rooms, car rentals, gas stations, restaurants, advertising, shipping, computer hardware and a huge 5% cash back on US office supply stores and wireless telephone service.
You can see that by simply being mindful of which card you use, it’s easy to rack up a massive amount of points and cash back. Having one business credit card is nice, but having 2-4 diverse business credit cards can really help you take advantage of the credit card perks. To see a full list with recommendations of business credit cards, go to Top 10 Business Credit Cards
4. Maximize Sign Up Bonuses- Using different credit cards to maximize the rewards is now, but to really hit it big, maximizing the credit card sign up bonuses are the easiest way. As a perfect example, the Business Platinum Card from American Express OPEN gives you 50,000 points after you spend $10,000 and an extra 25,000 points after you spend an additional $10,000 in the first 3 months. To simplify it, if you spend $20,000 in the first 3 months, you will receive the regular 20,000 points plus the 75,000 bonus points, giving you a total of 95,000 points. That’s before you even look at the $200 air travel credit, the $250 worth of lounge access, the $200 UBER credit. This card is stacked with perks and if you use it, you’ll actually have over $1,500 in sign up bonus benefits.
Another great option is to add the Chase Ink card which gives you 80,000 bonus points after you spend $5,000 in the first 3 months. That’s in addition to the 5,000 points you receive for the actual spend. To provide some context, those 80,000 points can be redeemed easily through the Chase Ultimate Rewards program and is worth $1,000. That’s one hell of a bonus for spending just $5,000 in the first 3 months.
5. Rainy Day Capital- As your business grows, so too will your capital needs. In most businesses, particularly if you sell physical product, the strange dynamic that you will find is that the more your business grows, the more working capital you will need. As an example, if you are a restaurant and each day you have 50 customers, you have to have to purchase enough food to serve 50 people. Now business is great, and your restaurant becomes a popular lunch spot for a few local businesses and you now receive 150 customers per day. That means you have to purchase enough food to serve 150 people. That means a lot more cash goes out the door. That’s working capital requirements and that’s where having a ‘rainy day’ credit card becomes a life saver. That’s a card that you apply for today with no intention of using it, except perhaps just to get that sign up bonus. After that, you keep it in your draw in case of a rainy day. The worst thing that could ever happen is your business grows and you simply don’t have access to enough capital to handle that growth. It is strongly recommended to have that 1 card that you don’t use on a day to day basis, but you have available for just such an occasion.
Credit Cards as Your Start Up Business Loan Solution, But Which to Choose…
The Ultimate Guide to Understanding Credit Card Perks
If credit cards are right for you, the next question becomes which credit card(s). Every business owner is unique and needs to choose the cards that suit their individual needs. The most common attributes to look at when selecting a credit card are:
1. Business Credit Cards Vs. Standard Credit Cards- When starting a business, it is natural to simply start using the credit card that is in your wallet to make business related expenses. The challenge with this is twofold, firstly, it becomes incredibly difficult to track business related expenses unless you have a good bookkeeping system or bookkeeper. The second issue is that due to poor tracking, it becomes overwhelming and difficult come tax time to know which expenses were for business and which were for personal use. Looking back 6 months, do you really think you’ll be able to remember which receipt is for a business-related meal and which was you buying dinner with a friend?
Our recommendation is to have at least 1 business credit card to create this separation. By having a separate card you’ll be able to accurately track business expenses and as a kicker, most business credit cards will actually integrate to your online accounting software such as Quickbooks or Xero. This will save you a lot of money on bookkeeping or accounting fees. As an added bonus, you can have this updated in real time, so you don’t have to wait till tax time to see how much you are spending on various business expenses.
A couple of other helpful features of business credit cards is that they give you the ability to have additional cards for your staff, great if you have a finance person, assistant or even a spouse who handles a lot of the purchasing for the business.
With the exception of one or two banks, the majority of business credit cards do not report to your personal credit profile each month. This is helpful to maintain a good credit score even when you are carrying large balances in the business, they aren’t reflecting on your personal profile. They do however report if you don’t make payments and are in default, so make sure you are making those monthly payments on time, even if it’s just the minimum.
2. Credit Card Approval Limits- One of the best ways to fund your business is with 0% APR introductory credit cards. Please notice the term ‘credit cards’. There are certain times that more than one credit card maybe suitable for your business. If you need $20,000 and each card gives you $10,000, by simply having 2 credit cards, you achieve your funding goal. Now let’s be mindful that if you are taking on more money, it’s advisable to have a well thought out plan of how you are going to use those funds and how you are going to repay them. A good rule of thumb is you want to have a plan to be able to repay the funds within less then 2 years. This will give you 1 year at 0% APR interest and another year at the usual interest rate.
3. Credit Card Rewards- It is not uncommon for business owners to utilize these rewards for their own personal consumption, though do speak to your accountant for legal and accounting advice. We hear all the time about business owners that are able to take their family on vacation based on the points they accumulate from business expenditures. Imagine how sweet it will be to work all year and then take a hard-earned vacation at the end of the year where flights and accommodation are fully paid for. What could be better than that?!
4. A Quick Look at The Types of Credit Card Rewards:
- 1. Cash Back Credit Cards- Simple and easy to understand. Each time you use your credit card, you earn a percentage of that back. The most common is 1% or 1.5% of everything you spend. Where it gets exciting is when you have the bonus categories where you can earn 2%, 3% and even 5% on the bonus categories. To learn more and see the full review of each card, go to our Top 10 Cash Back Card Guide.
- 2. Airline Miles Credit Cards- If you travel a lot, these may be perfect for you. Each time you use your credit card, you accrue miles for either a particular airline or for a generic travel card such as American Express Gold or American Express Platinum that you can use on a huge number of airlines. To learn more and see the full review of each card, go to our Top 10 Airline Miles Credit Card Guide.
- 3. Hotel Rewards Credit Cards- If you are a road warrior and spend time in hotels, these may be perfect for you. Each time you use your credit card, you accrue points for either a particular hotel chain or generic points with a generic travel card such as Amex Hilton or Amex SPG that you can use on a huge number of hotels. With all the consolidation in the hotel industry, the major chains have a wide variety of hotels in their group. As a great example, The Hilton Group has everything from The DoubleTree, to Hilton, to Conrad to The Waldorf Astoria. In fact, they have 14 different brands that you can earn and redeem the points with. Spending on the credit card can greatly accelerate this especially if you capitalize on their bonus categories. To learn more and see the full review of each card, go to our Top 10 Hotel Rewards Credit Card Guide.
4. General Travel Rewards Credit Cards-
In the credit card world, there are specialist rewards cards such as an Amex Hilton or a United Mileage Plus card or you can choose a more versatile card that points are accrued with your spending, but those points can then be used across multiple airlines and hotels. The most popular examples of these cards are the Bank of America Business Advantage Travel Rewards World MasterCard or one of the American Express Cards such as American Express Business Gold or the American Express Business Platinum card. These types of cards not only offer versatile rewards that you can use across multiple travel companies, they also offer additional premium benefits such as (be sure to check the card details for the most up to date terms and conditions):
- 1. Airport Lounge Access- Amex Platinum offers free access to 1000+ lounges
- 2. Bonus points based on spend- Each card has bonus categories where you can earn bonus points for each dollar spent in select categories. Chase Ink Business Preferred offers 3 points per $1 spend on the first $150,000 spent each year on select business categories
- 3. Purchase and Return Protection- Several cards offer extended warranty when you make a purchase with the card. American Express offers protection for theft, accidental damage or loss. This provides incredible peace of mind for major purchases.
- 4. No Foreign Transaction Fees- If you travel abroad, these cards provide a huge value add that they don’t charge you additional foreign transaction fees. Obviously, you’ll pay the currency conversion rates, but you avoid the foreign transaction fees which are usually 1-4% of each purchase which can really add up. This is a huge benefit when traveling. Chase Ink Business Preferred is one of multiple cards that provides this benefit
- 5. Extended Warranty on Purchases- For each item that has a warranty of less than 5 years, American Express will actually offer you an additional 1-year warranty after the original warranty
- 6. Concierge Services- This is a little-known benefit of some of the top travel cards, but it really is a great service that shouldn’t be underestimated. A concierge service at your disposal such as the one offered with the American Express Business Platinum card give you the ability to have a single point of contact that can organize anything for you. I mean anything! I once travelled to Dublin, Ireland and my passport need to be renewed before traveling back to the United States. Instead of calling and chasing after the Embassy, I was able to call the American Express Concierge, explain to them the issue and they actually called the Embassy, sat on hold for over an hour, explained the issue, conferenced me into the call for my authorization and organized my new passport. They even sent the required documentation over so all I had to do was go to the Embassy, wait all of 4 minutes and pick up my new passport. Now this is an extreme example, but if you are traveling and want an updated flight, hotel, rental card, restaurant reservation, sports or concert tickets, these guys are amazing! You can even just email your request in and they’ll get it all sorted. This is all offered as part of having the card, so no additional charge
- 5. Fuel Rewards Credit Cards- Depending on the requirements of your business, a little-known rewards type of card is a Fuel Card. These cards are ideal for any business that spends a good amount of money on auto fuel. The obvious is a truck driver, but this type of card is also ideal for a food truck owner, a sales person on the road, a delivery driver and anyone else that spends money on fuel. When we ask ourselves the question of ‘Why wouldn’t you have a fuel card?’ It starts to become pretty obvious if you need one or not
6. 0% APR Credit Cards-
If favorable payment terms are your priority, then 0% APR credit cards are probably going to be your preference.
- 1. Think about that, the bank is literally giving you money for a period of time, usually 12 months and not charging you a penny in interest. So why would this do this? It’s simple, banks are long term thinkers. They are willing to sacrifice revenue today to be able to create a client and create a lifetime revenue stream. Their thinking is if you come on as a customer with a credit card today, you have a good experience with them, they will be able to entice you with future financial services such as a checking account, a mortgage, a car loan, retirement account, investment account etc. In addition to this, if you are carrying a balance on the card after the 0% introductory period is up, then you will start paying interest and the banks obviously make money that way.
- Alternatively, you can use continue to use it as a regular credit card and be comforted in knowing that in the first 12 months, if you ever need to carry a balance for a month or two or even 12, so long as you don’t have a balance at the end of the introductory 12 month period, you won’t be paying a penny in interest.
Wow! That’s a lot of information about credit cards and can actually be a little overwhelming. So many credit cards, which to choose?
Here’s what we believe is the easiest way to evaluate: First, understand what is most important to you: Credit limit Vs. Perks Vs. Rates. If you are like most people, it’s usually a combination of 2-3 of those criteria. We usually recommend choosing which is going to be your most commonly used card first and then add another 1-3 cards to round out your credit card funding. This will now give you the ability to have several cards, so you can use them wisely and maximize the credit limits, best rates and credit card perks
We are also huge fans of a mobile app by the name of Wallaby. It allows you to designate which cards you have, and it will then recommend which card to use for which purchase to maximize rewards. If you take it a step further and link your credit cards, the app will also factor both the rewards as well as the available credit on each card. This app gets a 10/10 from all of us over here!
Here's the bottom line, credit cards are probably our preferred way of getting your business going. They are fast, easy and have a tone of perks. One of the other things we like about credit card funding is they are great for any business owner who has the credit profile to support it (680+ FICO) but they can also be used in conjunction with any other funding source. Let’s say you get a business loan, equipment finance, an SBA loan or borrow from friends and family, you can still use credit cards to supplement those funding sources.
Want to know what you are eligible for?Speak to a Funding Advisor/ Free Consultation GET STARTED
As our world evolves, so to do our startup funding options. We have witnessed over the last 10 years or so the explosive growth of crowdfunding sites. At first it seemed like a fad, but it has far exceeded fad and a huge amount of great businesses have gotten their start on crowdfunding sites.
The age-old question of Why? Comes to mind. Why on earth would anyone give money to a business owner to help launch their product or their business? It’s pretty simple, they want to be involved from the gross roots level. They may get to be part of a movement they believe in, pre-release access of the product or service or nothing more than to be a good citizen of the world and give back to budding entrepreneurs who are willing to put themselves out there and go for it. In its simplest form, they want to receive either 1) Rewards; 2) Debt Raise AKA Interest on their money or; 3) Equity in the venture.
is by far the most popular form of crowdfunding and has really taken off for startups. This model is quite simple for everyone to understand, in exchange for donating money, the business shall provide a reward, usually an early version of their product. This model is very popular for unique and exciting products that users want to get behind
is when users donate money in exchange for a pre-agreed upon return on that capital. Pretty simple to understand and usually goes like this; if you donate $100 business will return $120. There may or may not be a due date or perhaps another contingent action e.g. raise additional funds or launch the product within 2 years
is where users donate their money in exchange for a percentage ownership stake in the business. This gives you the ability to raise money quickly and have no obligation to return that money until you are profitable or have a sale of the business, partial or whole.
Crowdfunding is a great option but like all other funding mechanisms, is not going to be suitable for all businesses. Where crowdfunding is suitable is if you believe you can rally a community around your business idea or if you have an exciting product that is captivating to others who want to get behind you and help you succeed. A little known use is to have a community back a business that they believe will be beneficial to their community. A perfect example could be in a small town, let’s say a gym doesn’t exist but everyone agrees a gym would be a good thing for the town. If someone put together a great plan, created a compelling pitch, promoted it on one of the crowdfunding sites and then shared that with people in the town, they may be able to get local folks behind them, particularly if they are offered 3 month’s free use of the gym for anyone who donated say $200. This would give the person ‘free’ gym access that they wouldn’t otherwise have access to and they would be helping establish the only gym in town which they could continue to be a client of. This pitch could also be shared with people outside the town to bring in some additional money by other people who are enthused.
One of the most critical elements to a successful crowdfunding campaign is the story. If you decide to go down this avenue, be sure to work on your story. It is usually more of an emotional reason then an intellectual one that compels people to donate. This is absolutely something you want to spend time on developing, testing and refining. Your story needs to be compelling and at its core, there needs to be someone who benefits from this campaign other than just yourself. You will have a lot more success with a business pitch that aims to solve a problem, make like better or connects people other than just making a profit. It’s OK for the business to make a profit, it just needs to be whilst bettering the lives of people.
Some of the most popular crowdfunding sites include:
Specializing in launching businesses via crowdfunding. A combination of private citizens as well as investors utilize this platform.
Specializing in projects that are unique and may not have the same focus on profitability but rather on unique cultural experiences
Specializing in unique and cutting-edge products
5. IRA or 401(k) Investment
A little-known strategy for funding your start up business is to actually use the funds in your IRA or 401(k). As your personal retirement funds, you are entitled to invest these funds in a business, in this case, your own business without paying early withdrawal penalties or income tax. This is known as Rollover as Business Startups (ROBS). It is not a loan against your retirement account but rather it is your retirement account buying shares in your new business entity.
If you have worked hard for years and have equity in a 401(k), you may be able to use these funds to start a business. However, it is not as easy as just writing yourself a check from your 401(k) account. You must follow the legal process very carefully as there are significant penalties for improperly using your 401(k).
The best way to invest your 401(k) into a startup business is by rolling the money into a corporate retirement and then investing the money from the retirement account into the business. While this is a very strong option for starting a business if you have the funds available, we strongly recommend speaking to a qualified financial advisor before taking action. First and foremost, you want to ensure you aren’t breaking any laws and secondly, you want to make sure you aren’t overpaying in taxes and penalties which is very easy to do if you use an incorrect structure
This usually only makes sense if you have a minimum of $50,000 in your retirement account that you are willing to invest into your own business.
So why would someone use their own retirement account as opposed to a loan or credit cards for a startup business loan? It’s simple, if you are extremely confident in your business and yourself, then it may make perfect sense for you to have your retirement account ‘invest’ in you and your business. The ultimate question becomes, would you prefer to invest in your business or publicly traded companies that you have no control over? If you do have the confidence, then this is a worthwhile funding avenue to explore.
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6. Equipment Finance
If the desired startup business funding is strictly for a specific piece of equipment, this may be the ideal funding method for you. Equipment finance is generally for any piece of physical equipment that when put to work in a business, can generate revenue. A couple of examples would be commercial kitchen, manufacturing machinery, construction equipment, vehicles that can include trucks (long haul and short haul), construction vehicles, heavy machinery and many other pieces of equipment. Although not a definitive rule, many equipment leasing firms do not provide financing for office IT equipment due to rapid depreciation rates. With that said, there are specialty firms that do and even more so, there is a large array of vendors that actually provide vendor financing or leasing for their equipment.
Equipment financing can be broken up into 2 main categories:
1. Equipment Leasing- This will allow you to lease the equipment for a st monthly payment for a set number of months but never actually own it. Many people are familiar with this form of leasing as it’s similar to their auto leasing. This type of financing is usually offered by dealers as it allows for the business owner to turn in the equipment at the end of the lease or alternatively, if they want to keep it, they can pay a large balloon payment and take full ownership
2. Equipment Financing- By choosing to finance the equipment as opposed to leasing the equipment, the business owner is making some tough decisions. The reason being is that the monthly payment will be higher with financing as opposed to leasing, but they will be the actual owner of the equipment. And these are the 2 core differences; ownership Vs leasing and higher monthly payment Vs lower monthly payment. So why would a business owner choose to finance over leasing? The 3 main scenarios where this makes sense are:
- 1. No Eligible Leasing Options- well that made the decision easy. There aren’t always leasing options available, so financing is the only way to go. If this is the case, then the decision has already been made
- 2. Pre-Owned Equipment- This is particularly important to understand for pre-owned equipment. Very few if any leasing companies will provide leasing financing for pre-owned equipment as it may not be covered by warranty and they can’t determine the true condition of the equipment the way they could with a new piece of equipment. This is a very important criteria for you to decide what you want to do. A simple scenario is if at first you were planning on purchasing a pre-owned vehicle for $20,000 but when looking at a new vehicle for $30,000, if you can lease the new one but only finance the pre-owned one, it may actually be cheaper per month to go with the new one. This is where it becomes counter intuitive. Think about this, it may actually be cheaper per month for you to purchase a new piece of equipment as opposed to buying a pre-owned model. When making the decision to purchase, you should always evaluate the entire package; the cost of the item + the cost of the financing. If you aren’t sure, don’t be afraid to reach out to an accountant who can help guide you through this impactful financial decision. This should only cost you less than $1,000 but will be the best $1,000 you may ever spend!
- 3. Desire to Make Modifications- If you are leasing a piece of equipment, at the end of that lease term you are required to return in the same condition, minus normal wear and tear. If you are planning on making any modifications to the equipment, then leasing probably isn’t the best option for you as you will be in breach of the leasing agreement and you will be required to pay a very stiff penalty, which could include the balloon payment and have no return options available to you
- 4. Long Term Ownership- If you plan on using the same piece of equipment for a long time, financing maybe a better option then leasing. With leasing, you pay a lower monthly payment, but you are always making a payment every month. If you decide to finance the equipment, you will pay higher monthly payments for that same period, but once that period is over, you will then own the equipment with no more monthly payments. This is ideal if you can continue to use the equipment long after the financing period is over. Imagine getting to continue using the same equipment every day but all of a sudden, you no longer have any monthly payments, that has to be a pretty sweet day!
So what equipment financing/ leasing options are available to startups? Well, here’s the good news, there are actually some pretty good options available businesses. Why? The nature of equipment financing/ leasing is that there is collateral ie the equipment, so if you don’t make payments, the finance company can legally reposes the equipment. It’s not that they want to, but they are in a position to if they have to. Because these finance companies are in the business of making money, they aren’t interested in breaking even or even losing money. To achieve this, they need to ensure that they always have more value in the equipment then what they have provided the business owner. Here’s a practical example, if you have a piece of equipment that is worth $20,000, if you make payments of $5,000 and then stop, they would have to reposes the equipment and hope they can sell it for over $15,000, now once we take into account the depreciation, this becomes a risky proposition for them. To help mitigate the risk, they usually require the business owner to pay a down payment, usually 20% of the purchase price. If we go back into the $20,000 piece of equipment, if you pay $4,000 (which is 20% of the $20,000) they are only providing financing for $16,000 which immediately reduces their exposure. Now let’s assume the same scenario that you made payments of $5,000 and then stopped, the financing company would now have $9,000 of value in the equipment so if they had to reposes and sell it, they would only need to be able to sell it for $11,000 to break even, which is more than likely a lot less than the value, so they could actually sell it for more than that and make a profit. Don’t worry! They don’t want to reposes anything, they would much rather you make your monthly payments and if you are having an issue, reach out to them and you can usually create a new payment structure. Repossessing is the true last resort. In fact, the default rates on equipment financing are some of the lowest out of all business funding mechanisms and one of the main reasons for this is because this is a piece of machinery that is being put to work and making you money, it’s not recreational.
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7. Angel Investors
Though not commonly used for small businesses, but if you believe your business is not destined to be a small business, this may be a good fit for you. Angel Investment is the investment of money into a business by high net worth individuals who are looking to make a return on their money. They are usually looking for a minimum of 10x return on their investment within 3-5 years. For this reason, expect they will look for a sizable equity component.
If you believe this good be a good option for you, the first step is to create a strong pitch deck that you can use to present your business, the merits of the business, the potential revenue and your team. Forbes wrote a great article on the actual deck which can be found here and you can also find pitch deck templates here. This will be the first and one of the most important documents that you create for your business as it’s designed to show your business to be attractive to others to invest money in your business. This is definitely an area you do not want to skimp on.
To gain access to angel investors, it comes down to referrals. Keep in mind you are asking someone to invest their heard earned money into you and your business, this is a huge element of trust that you will do what you say you are going to do. One way they can minimize their risk is be investing where they have personal recommendations. Remember, they are actually investing more in you as a business operator then they are in the actual business idea. If you ask any investor if they had a choice, would they rather invest in a great idea but with a bad team or invest into a bad idea with a great team, they will all choose the bad idea with the great team. Why? Because great ideas come and go each and every day. Great teams are able to work hard, make good decisions and change directions if need be. They are able to attract other high caliber team members to help grow the business. Knowing this, it shows the importance of you own personal track record, your integrity and your relationships. There is no one single way to develop these kinds of relationships, but it’s always a good start to put yourself in similar surroundings both professionally and recreationally to start to meet the people who can be influential in your business life. Start with industry functions, trade associations or something as simple as, if you have a job currently, work with the right people in your current company who may be able to be supportive when the time comes for you to take the leap and start your own business.
There is obviously a magnitude of ways to fund a startup business and there is no one size fits all. Each and every business is special and unique. It is your baby, your love, your hard work, your everything! Our genuine desire here at Seek Capital is to help provide you with the information to allow you to make an informed decision for yourself. Remember, when you are an entrepreneur, you will have to make many critical decisions, and this is one of the first of many. Don’t be intimidated, don’t be overwhelmed, don’t be deterred. Take 1 step forward, then another, then another, before you know it you will be running at full speed with your own highly successful business.
Great Quote from Timothy Ferriss, author of the 4 Hour Work Week:For all of the most important things, the timing always sucks. Waiting for a good time to quit your job? The stars will never align and the traffic lights of life will never all be green at the same time. The universe doesn't conspire against you, but it doesn't go out of its way to line up the pins either. Conditions are never perfect. "Someday" is a disease that will take your dreams to the grave with you. Pro and con lists are just as bad. If it's important to you and you want to do it "eventually," just do it and correct course along the way.