If you’re like most entrepreneurs, you’ve already spent enough of your personal savings — even your personal credit — getting your startup off the ground.
Now it’s time to really get your business underway by securing the capital you need to compete in your industry.
Once you clarify your business plan, financing opportunities often come in the form of grants. Many grants exist, including millions of dollars offered through government programs. But most grants are intended for established businesses that have specific purposes and strict requirements and deliverables.
Grants are also not typically available for startup or expansion costs. Once you do get established, or if you’re curious to take a look at what’s available, www.grants.gov is an excellent starting point.
Crowdfunding is another form of free money that’s gaining a lot of attention. Crowdfunding is essentially a funding campaign that brings in small contributions from many different people to help someone complete a project, develop a product, or even start a business.
While free money can be great for businesses in certain circumstances, it’s not always a surefire way to find startup capital. It’s important to understand other options.
Loans and Business Credit: Understanding Your Options
There are a number of options available when it comes to obtaining business loans or lines of credit. In order to decide which source is best for you, you need to consider:
- The amount of funding you need
- The purpose of the loan and whether the funding source places any restrictions on the use of the loan
- How quickly you need the funds
- The interest rate you can afford to pay
- The amount of time you need to pay it back
Once you consider these elements, there are multiple methods of funding out there that can help you meet your goals:
Credit cards remain one of the most popular methods of funding for new small business owners. However, the risk of using any form of personal credit involves mixing personal liability with business liability. If you run into any problems with your business, including a loss of revenue, your personal credit is on the line.
One option to consider is opening a secured business credit card. When you do this, you typically deposit all or a percentage of the credit line with the creditor.
You then use the credit card as you normally would and make payments to establish a good business credit history. As your business credit score improves and your business grows, you should find more business credit options available.
Much like crowdfunding, peer-to-peer (P2P) lending pulls together “investments” from a group of unrelated people to help fulfill a loan request.
Unlike crowdfunding, P2P lending is a more formal process. It requires a credit check, minimum credit requirements, and a formal loan agreement with payment terms and a set payment schedule. Rates will vary depending on the credit profile of the lender, but loans are often approved quickly — funds can sometimes be received in less than a couple weeks.
Microloans are typically small loans — from several hundred dollars up to about $10,000 — that can be used to provide working capital or funds for materials, operations, or equipment.
Organizations that provide microloans are typically affiliated with a certain group of people, a social cause, or have a specific focus or mission. The limited capital and lack of flexibility make them a relatively poor choice for most businesses. On the other hand, if you find a match between your business and a microloan organization, you may be able to build a relationship that helps your business and the lending organization.
Merchant Cash Advances
Since the start of the banking crisis in 2007, credit options for individuals and businesses have tightened. Even if you play by all the rules and have an established business and credit profile, you may find it difficult to obtain funding from any of the sources listed above.
And if you do qualify for a traditional loan? You may still find yourself in a situation where you need funding tomorrow to address an immediate expense — or your funding needs may not meet the criteria imposed by your preferred funding source.
One unique approach to lending is the merchant cash advance. This is a credit vehicle used by both small- and medium-sized businesses to obtain money fast with little to no restrictions on how the funds are used.
A merchant cash advance provides you with funds in exchange for a commitment to automatic repayment through your business’s credit card transactions. Business owners will pay a slightly higher rate than they would with conventional loans, but you can receive access to funding in as little as a couple days. It’s becoming an incredibly flexible and attractive source of funding for many business owners.
Before you pick a funding option for your startup, consider a few final tips:
- Operate your business as a business, not as an extension of your personal finances.
- From the SBA to your local Chamber of Business and Industry, there are plenty of resources out there. Don’t be afraid to ask for help.
- Make sure you consult an accountant or tax professional to not only stay in compliance with the law, but also take advantage of the deductions and credits available to business owners.
If you follow these tips, you’ll be making the necessary decisions that help your startup grow and secure funding.
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