One of the main reasons small businesses fail is a lack of adequate funding, according to experts such as the U.S. Small Business Association, an organization tasked with helping would-be entrepreneurs pursue their dreams. Even entrepreneurs with a great product or service idea and lots of corporate experience often try to launch and run a new business without enough money to properly manage their new venture’s basic needs.
Knowing where you can get capital to help launch and run your business until sales revenue starts to flow (and how to identify which options aren’t your best fit) will help you increase the chances that your dream becomes—and stays—a reality.
One of the easiest ways to fund a new business is also one of the riskiest. If you don’t have cash to purchase materials to make your product, pay for advertising or buy equipment, credit cards can help you get the ball rolling so you can begin making sales. In addition to your personal card, you can open a small-business card. Unlike corporate cards reserved for large companies, small-business cards are tied to your personal credit, so you are on the hook for any balances if your business goes south.
Many successful entrepreneurs have launched profitable businesses using credit cards. To avoid gambling with money you don’t have, use credit cards proactively and with a plan. Determine in advance how much capital you need to start your business, how much credit you have or can get with a new card, and how much debt you can afford to personally carry if your business fails. Don’t use more than that amount, even if you feel your business is “almost there.”
A relatively new source of funding for small businesses is crowdfunding, which allows many people to put in smaller amounts of money for a piece of the pie. For example, you might offer 100 people an opportunity to donate $100 each, raising $10,000 for your business. They get a small percentage of your profits or some of your product in exchange. Or, 1,000 people might donate $5 each, expecting nothing in return if your company interests them enough. If you are starting a nonprofit, people might donate money to help you out. Artists fund movies, albums and other activities through crowdfunding, and entrepreneurs fund successful businesses regularly. And you won’t believe some of the wild things successfully funded by crowdfunding efforts.
Check out these 10 crowdfunding sources listed in 2013 on the Forbes magazine website as the best crowdfunding platforms:
Dipping into an emergency fund, retirement savings, investments, vacation account or college fund can be tempting, but comes with great risk. Just as you should do your homework when using credit cards to start a business, consider the risks (including tax penalties) of using savings to launch your business.
Even if you don’t plan on using savings to fund your business, you should review the penalties and downsides associated with doing so in order to avoid the temptation of dipping into savings if things get tough for your business. On the other hand, you might find you only need a few thousands dollars to launch your business, which may not hurt your long-term savings plan—especially if your business starts producing profits.
You can also use savings for bridge loans. Let’s say you need $2,000 to pay for materials to make your product and you have $5,000 (guaranteed) in customer invoices arriving in 10 days. You might be able to dip into a retirement savings account and put that money back before you’re penalized too heavily. The $2,000 investment in materials might allow you sell $10,000 in product, outweighing the cost/penalty of taking the loan.
Friends and Family
You can more easily borrow money from friends and family if you show them you’re serious enough about your business that you’ve written a business plan. Let them see your product or service idea, competition, target customer, marketing plan and budget. Offer them part ownership of your business or a piece of the profits. Since these are personal relationships you’re dealing with, make a commitment to talk with them frankly about the possibility of your business failing so that you both know the risks and how it will affect your finances and relationship if the business doesn’t work out.
Some businesses will benefit from your launch—if your product or service helps them reduce their costs or increase their sales. For example, if you’re thinking of opening a bakery, local restaurants that can’t make their own desserts might want you to make custom items for them. On the other hand, certain companies could be potential suppliers to your new venture, giving them a vested interest in your business. Look at businesses that will benefit from your idea and ask if they are interested in partnering with you financially. In addition to funding, they might give you access to their equipment, employees or customer lists.
Depending on your business plan and assets you can use as collateral, you might be able to secure a small business loan from your local bank. Banks that might not lend you money might be willing to issue a loan guaranteed by the U.S. Small Business Association. To see if you qualify for this program, visit the SBA website for small-business loan information. Asset-based lenders require collateral. You can take a second mortgage on a home, use your car as collateral or your business equipment. So keep in mind that asset-based lending comes with the risk that you lose your asset if you can make your payments on time, and the lender can take a valuable asset, sell it for less than market value and give you none of the difference.
Letters of Credit
Like a business loan, a letter of credit gives you access to funds as you need them, rather than with an upfront lump sum. You might have enough money to fund your business, but the people who sell you supplies or provide you with services might be less nervous if you can show them you have a letter of credit from a bank or investor. You might never use the credit, paying no interest. You might only use a part of your available credit line and pay it back quickly. You can access the credit on a regular basis, using the money to pay for materials you use to make your product, then pay the money back as soon as you sell the product.
Angel Investors/Venture Capital
Angel investors and venture capitalists are looking for small businesses that can become home runs. They will lend you money in exchange for a significant portion of your company. Some will ask for majority ownership, a percentage of each sale or a percentage of your profits. In some cases, you don’t need to pay back the funding because the investor gets a larger piece of the pie for assuming risk. Some investors may want to become active partners, while others will remain silent partners to limit their liability.
Selling sizable assets like vehicles and property can garner a huge profit, sure. But, believe it or not, a garage or yard sale might be all you need to raise the capital to start your business. Some new businesses take less than a thousand dollars to start, with sales revenues coming quickly enough to operate the business from there on out. Yard sales can raise several thousands dollars. Clean out your closets, attic, basement and garage. Ask friends and family if they have old items they’d be willing to give you in exchange for you hauling them away. Can you downgrade your car and put an extra few thousand dollars in your bank account?
If you have already launched your business and have receivables (debts owed to your company), you can sell these at a discount to a businessperson known as a factor. You will have to prove that these receivables are likely to be collected, and often have to sell them at a steep discount. A factor might pay you 30 cents on the dollar, collect most (but not all of the receivables) and have to wait 30 to 90 days to collect the amounts.
Sam Ashe-Edmunds has been a small-business consultant and owner for more than 25 years. He has written for a wide variety of magazines, newspapers and websites, including Entrepreneur, The Chicago Tribune, Chron Small Business, AZ Central Your Business, TheNest, Zacks, Motley Fool, Synonym Money, GlobalPost and Opposing Views.