Three Popular Start-Up Financing Options

Three Popular Start-Up Financing Options | U.S. Small Business Administration
By kmurray, Contributor and Moderator
Published: May 21, 2014

Thinking about starting a business? Recent studies and reports have shown that entrepreneurs are more optimistic than in recent years when it comes to the state of their businesses this year, and that’s great news! But always high on the list of concerns for starting a business – even in optimistic times – is financing. Here’s a roundup of some ways, aside from avenues such as SBA-backed loans, to finance your business.

Credit Cards

According to expert Marco Carbajo, credit cards are a major source of financing for small business owners, with statistics even showing that more than 65% of small businesses using them on a frequent basis. It’s a popular approach, but you should be sure to do your research to determine if it’s the right one for you. Here are some tips from Entrepreneur.com (link is external) to help:

• Unless your business is incorporated – so if yours is a sole proprietorship, for instance – you are guarantor of all debts. So if your sales are slow and you fall behind on payments, you risk your personal credit rating and ability to borrow.
• It varies by state, but your credit-card issuer might still require that shareholders with significant ownership guarantee the line of credit – even if your business is incorporated.
• Potentially bringing on partners? Make sure your agreement states that they’ll accept personal guarantees on all existing business debt. You need to address this specifically because in many states, new partners aren't automatically responsible for previous debts.
• Read the fine print. Don’t accept an offer without checking into the details, understanding the terms of use and evaluating risks. Don’t hesitate to ask a professional for guidance.

Friends and Family

Asking friends and family to borrow funds to help finance your business sounds like it could get awkward, but it doesn’t have to. Treat the process just as professionally as you would an engagement with a bank. If you done right, you can potentially gain quicker access to the cash you need and jump through fewer hoops – after all, your friends or family already know you. Read more about borrowing from friends and family in our article here, but think about these highlights as you consider this option:

• Think carefully about who you’ll approach and make sure they understand the risks (and rewards) of getting involved. Keep in mind if your business doesn’t work out and you can’t repay your obligations, relationships could suffer.
• Be realistic about how much money you need. Instead of asking for the maximum, consider what you need to get you to a certain point in your business plan. Once you show you can repay that initial investment, you’ll be in a better position to ask for more money if you need it.
• Write it down. You might think a verbal agreement with your friend or relative is sufficient given the personal relationship, but this is business. Consider this advice (link is external) from Entrepreneur.com: "Any time you take money into a business, the law is very explicit: You must have all agreements written down and documented. If you don't, emotional and legal difficulties could result that end up in court. And if the loan isn't documented, you may find yourself with no legal recourse.”
• Communicate. Show your business progress and share updates along the way, even if it’s correcting mistakes you’ve made with your business strategy. Checking in and sharing information shows that you’re taking seriously the role others are playing in your venture and demonstrates professionalism.

Crowdfunding

Increasingly, crowdfunding is becoming a popular way for people to get startup financing for their businesses. You’ve probably heard of Kickstarter campaigns – that’s crowdfunding. It works through a collective cooperation of people who network and pool their money and resources together, usually online, to support efforts initiated by others. So it gathers multiple, smaller investments as opposed to a single source of funding. You can read more about the details here, but here are three other key considerations from Entrepreneur.com (link is external):

• You should begin working on your crowdfunding campaign six months before you want to launch your project. When your campaign starts, you should’ve already made a significant effort in letting people know about it collecting email addresses so you can really hit the ground running when you open the gates for your campaign.
• Set your funding goal as low as you can manage because some crowdfunding platforms, like Kickstarter, are “all or nothing.” For instance, if you set a goal of $1,000 and you meet it, then you get the money. If you raise only $500, you won’t get anything. Read the fine print about the platform you choose so you can be strategic about your funding request.
• Don’t forget to award your donors. You’re asking people to take a risk on your business venture – there are no guarantees. So thank them and show your appreciation by offering your product or service at a discount when the time comes.

You can also learn more from our online Learning Center course, “Introduction to Crowdfunding for Entrepreneurs.”

Beyond a “traditional” track of securing a loan from a bank, there are quite a few avenues to consider for financing your business. And with passion, professionalism and planning, you’ll establish a good foundation for success down any of these paths.