Got a cool business idea? Well there are all kinds you can start. From managing a franchise, to supplying a service in your local area to e-commerce. However, even the less expensive businesses need capital. So what are the best ways to find capital? Do you have any ideas what your expenses will be and how you will get going? It may make sense to start out on a napkin, spreadsheet, or piece of paper and write out some rough estimates of costs.
This informative post from Money Crashers lists some of the best ways:
Before your business can have any hope of becoming a legend (or even just profitable), you need to find a way to finance its birth. The SBA states that in 2009, the Ewing Marion Kauffmann Foundation estimated the average cost of starting a new small business in the U.S. to be about $30,000. While the number may seem shockingly high, today’s entrepreneurs have a wide range of options when it comes to financing startups.
- Friends and Family
If you can’t tap your own piggy bank, or if your credit score isn’t good enough to convince a bank to lend you money, you can always turn to the people who know you best. Family members and friends can be easier to persuade than anonymous bank officials. They are also more likely to look past your current account balances and credit score when determining whether you are worth the risk of extending a loan. Moreover, they are less likely to demand stringent repayment terms or high interest rates – and in the case of family members, you may escape interest rates altogether.
Borrowing from a personal friend or family member is a very popular option. In fact, a 2015 survey by Pepperdine University found that 68% of responding small businesses used financing from the owners’ friends and family.
Needless to say, borrowing from friends and family comes with its own set of risks. If the venture fails, or if it takes much longer than anticipated to repay the loan, your relationships can suffer. If you default on a credit card or bank loan, you don’t have to sit down to Thanksgiving dinner with the loan officer or credit card company. If you fail to pay back Aunt Sally, you may never hear the end of it.
Few things can complicate friendly or familial relationships like misunderstandings over money. If you decide to borrow from those close to you, make sure that you have all the terms of the loans clearly written out. That includes how much is to be borrowed, the amount of interest charged, and the timetable for repayment.
Just to reiterate, you do not want to impose on anyone and they don’t owe you the money. However, if you have a good pitch presentation and a reasonable path to profitability, it is acceptable to show it to them should you go this route.
This next one a lot of people so not know about:
- Small Business Administration (SBA) Loans
Created by Congress in 1953, the SBA doesn’t lend directly to small businesses. Instead, the SBA offers a variety of guaranty programs for loans made by qualifying banks, credit unions, and nonprofit lenders.
Despite the lingering effects of the economic crisis and recession, the SBA says that its loan programs are experiencing “unprecedented growth.” According to the SBA, in fiscal 2014, the number of 7(a) loans extended to small businesses jumped 12% over the prior year, while the dollar value of those loans increased 7.4% over fiscal 2013.
7(a) Loan Program
These loans are a very common means of funding small businesses, and can be used to launch a new business or expand an existing business. There is no minimum 7(a) loan amount, though the SBA states that the program won’t back a loan of more than $5 million.
The SBA says that in 2012, the average 7(a) loan amount was $337,730. For loans up to $150,000, the SBA may guarantee a maximum of 85% of the loan; that falls to 75% for loans above $150,000. The repayment terms state that all owners of the prospective business that have at least a 20% stake in the venture are expected to personally guarantee the loan’s repayment. Furthermore, according to the outline of the use of 7(a) loan proceeds, 7(a) loans cannot be used to repay delinquent taxes, finance a change in business ownership, “refinance existing debt where the lender is in a position to sustain a loss and SBA would take over that loss through refinancing,” or repay equity investments in the business.
This next one is a source you may or may not know about also. There are folks who absolutely specialize in this type of investment. And many of them have good advice if you ask:
- Angel Investors
If you can’t get enough cash from the bank or your own assets and you don’t have a rich uncle, you can always look for a wealthy non-relative. Some well-off individuals like to invest in startup ventures – often in exchange for an equity stake in the new business. These investors are known as angel investors. Typically, an angel investor has been successful in a particular industry and is looking for new opportunities within that same industry.
Not only can angel investors offer financing to get your business off the ground, but some are willing to provide guidance based on their own experience. They can also leverage their existing contacts within an industry to open doors for your business.
So how do you find these angels? It can take some research. Many angel investors prefer to keep a low profile and can only be identified by asking other business owners or financial advisors. Other angels have joined networks, making it easier for potential startups to locate them.
Businesses have been using the Internet to market and sell things since the 1990s. However, over the last decade, the web has become a new source of financing as well.
This next one is new also and only been growing in the last couple of years online:
- Peer-to-Peer Loans
Simply put, peer-to-peer (often denoted as P2P) lending means borrowing money without going through a traditional bank or investment company. Under P2P, a borrower posts a loan request on a P2P platform – such as Lending Club or Prosper – stating the amount desired and reason for the loan. Potential investors review the request and agree to loan various amounts of money to the borrower up to the desired amount. Once a loan has been funded, the borrower receives the total amount lent and then pays the loan back through fixed monthly payments made to the platform, which then repays the investors based on the amount each one lent.
No matter what way you choose make sure you think out a lot of details and how you would actually starts the business. Get advice from people who have been successful and go from there.