Deciding to start a business is exciting. You are in charge of making decisions large and small, and you have the opportunity to change your life, and possibly other lives as well. But starting a business also brings challenges. Almost all businesses will require some form of capital to start. If you don’t have cash reserves in a savings account or other liquid investment available to use, you’ll have to find other ways to fund your startup. Here are some common methods for getting the money you need to start your business:
How to Fund a Startup
Bootstrap or Fund it Yourself
Most small businesses are started through bootstrapping (raising the money yourself). You may wonder how that’s possible if your funds seem to be tied up in your regular expenses, but you can make it happen.
Some people get a second, part-time job to earn additional income temporarily. Some people choose to start a business with extremely low start up funds and work a few hours a night or on weekends, building the business while keeping their full time jobs. The internet makes this a possibility for many different industries. Take for example, starting a blog.
Don’t quit your day job! Always keep your “real” job until the business is earning enough income to support you. Most businesses don’t take off and earn profits as quickly as expected. It may take longer to build the business, but you’ll be growing a business and maintaining financial security at the same time, which is a smart move!
Small Business Loans
If you’re starting a retail business or other business which cannot be started from home or online, then you may need to consider a small business loan. Qualifying for a small business loan is more difficult in the current state of the economy than it was a few years ago, but it is still possible. You’ll need a strong personal credit rating and a history of making your payments on time. If you don’t have a high credit score, you may be denied a small business loan from banks or credit unions. Be sure to gather all the required information, create a solid business plan, and present a strong case when you apply for your small business loan.
Peer to Peer Lending
If you’re unable to secure a traditional bank loan, you may be eligible for borrowing on a peer to peer lending site, like Prosper.com or LendingClub.com. Most peer to peer lending sites, or social lending sites, allow you to list your request for a loan if your FICO credit score is 640 or better.
Once your loan is listed, lenders can offer you a portion of your loan, and multiple lenders will agree to lend a certain amount of your loan. If you get enough lenders willing to completely fund your loan request, you can borrow the money. Your payments go through the social lending site, and is distributed to the lenders accordingly.
Borrow from Family or Friends
Many people get the money they need to start a business by borrowing from family and friends. This may be an option if you are comfortable asking them for money, but keep in mind that money is the fastest way to ruin a relationship. Make sure you have a solid business plan in place before asking friends or family to lend you money. You should also agree to a repayment schedule and terms in writing to help prevent miscommunication. Don’t let money damage a relationship.
These are listed more or less in the order I would recommend someone get a loan. Normally I would suggest getting a loan from a family member last, because you don’t want to ruin a good relationship if your business deal goes sour. But credit cards can be even more dangerous if you aren’t careful. That said, credit cards may be a viable option if you are careful. If you can get a 0% interest credit card, this may be a good option (if you can’t find a good 0% interest credit card, then try going after a low interest credit card). Just keep in mind anything you put on a credit card has to be paid back before the 0% interest ends; or on time each month if you are paying back a credit card with interest. It’s very easy to get in over your head with credit cards and this should be used as a last resort for funding your business because of the risks involved.
Risks and rewards. All of these methods of funding your startup come with different risks and rewards. Be sure you come up with a real business plan before you start – otherwise you risk throwing your money down the drain.