List of Business Financing Options for your Startup

Do your due diligence to research all the avenues open to you to access capital for your business. Here’s some options to consider exploring:

• Bootstrapping – As in ‘pulled herself up by her own bootstraps’, Bootstrapping refers to self-funding a startup. If you’re not swimming in loot, don’t worry. There are several versions of this tactic, all of which are most often combined with other strategies. A few of these strategies include:
  • Personal Savings – The PRO is that you’re legally/financially accountable to no-one and you don’t have any interest payments. The CON is that you assume all the financial risk with almost no protection if the business loses money.
  • Retirement Accounts (ROBS) – If you have over $50,000 in an Individual Retirement Account (Roth IRA or traditional IRA) or a 401(k), it is possible to use your retirement savings as startup capital for your new business.
  • Personal Credit (Credit Cards) – While credit cards are a relatively simple and easy way to make capital purchases, there is a significant risk to your personal credit.
  • Personal Credit (Home Equity Loans) – We include this option on our list of startup capital sources to show one extreme, but do not necessarily endorse this method.
  • Friends & Family – This is a pretty common strategy because it involves fewer hoops and less financial risk than taking out a loan or charging against your credit.
• Banks – While this is generally where people’s minds go first, it is not necessarily the best source of startup capital. Banks are generally wary of lending to startups, especially if you don’t already have any commercial assets. For the most part, banks are a much better resource once your business is off the ground or if this is not your first small business. Here are a few targeted areas where the bank may be more willing and able to assist with capital.
  • Term Loans for Machinery – Banks may lend you money, in the form of a term loan, toward the purchase of equipment or machinery. Financial institutions are much more likely to lend you money to buy fixed assets that will have value no matter the outcome of your new endeavor.
  • Term Loans for Working Capital – ‘Working Capital’ refers to cost-of-goods (inventory) and providing credit to initial customers of your fledgling business. Banks will typically work off of a business model you provide to assess if their investment will make a return through customer purchases.
  • Loans for Research & Development – Banks may be more interested in loaning capital if your business model involves the development of technology or other patentable items/ideas. Of course, you will be required to adequately demonstrate your capability to create this potentially profitable merchandise or intellectual property.
• Microloans – Microloans are private loans from non-profit groups that are specifically tailored for certain types of startup businesses. Generally, these loans are for amounts less than $10,000, so they aren’t for substantial capital purchases. Because of the variable interest rate (as high as 22%), I don’t advise that you take one out if you don’t have a high degree of confidence you can repay it quickly. Many microloans are for very specific businesses or business owners such as DBEs (Disenfranchised Business Enterprises). DBEs include businesses owned by women, minorities, or individuals with disabilities.
• Venture Capital – Many people know this term (possibly because it sounds really cool) but not much about it. Venture Capital investors are investment firms that inject seed money into other businesses. Rather than charge interest for the money (or even expect it back), they buy equity or a minority stake in the business. This means that will you share profits with the Venture Capital firm. Also, because Venture Capital firms have their own investors to report to, they will take a more active role in the managing of your business. Look for venture capital for startups. While this can be a good source of capital for the right entrepreneur, it can be extremely difficult to obtain. Venture Capital firms target opportunities with high reward potential, typically in specific industries such as medicine or technology. Learn how to best pitch investors.
• Angel Investors – Angel Investors are similar to Venture Capitalists, but there are a few key differences. First, Angel Investors are more likely to be wealthy individuals or families, rather than corporations. They also tend to make their selections based on their belief in you, the business owner, in addition to your business model. For this reason, aggressive networking and maintaining an unimpeachable reputation in the business world are both very important for attracting the right Angel Investor. Finally, while Angel Investors may be interested in obtaining a higher percentage of your business than Venture Capitalists, they are much less likely to ask for an active role in managing the business.
• Government & Private Grants –  If you have the right sort of business, government grants and private grants can be great avenues for obtaining capital as startup business grants. It’s basically free money. Unfortunately, of all our potential sources, these tend to be the most difficult to secure. Generally, the types of institutions eligible for grant money are very limited (e.g. schools, churches, charities) and you may need to first receive a certain tax designation from the IRS. Obtaining grant money and retaining your eligibility is a complicated process.

The Bottom Line

If you take one thing away from this post, it should be this: don’t let your current financial situation stand in the way of opening your next small business. The opportunities are out there for entrepreneurs with the fortitude and humility to try a few different doors before they find the right source of startup capital for their next great business idea.