Starting up a new business can be extremely challenging, even for the most seasoned entrepreneur. One of the toughest hurdles of getting started is securing the money you need to lay the groundwork necessary for your business, such as renting an office space, purchasing equipment, or buying inventory. The good thing is that there are many paths you can follow to get the money you need to start your business. Below are 10 suggestions of how to finance a new business.
1. Personal Savings
If you are lucky enough to have a significant amount of cash saved up, this can be a great way to finance your business. Dipping into retirement accounts like your 401K or an IRA is also an option, albeit a risky one.
2. Credit Cards
Financing a business on credit cards is another risky proposition, but one many new entrepreneurs choose to take. To limit your personal liability, try to open accounts specifically for the business. Do your best to pay your bills in full and promptly, otherwise you might damage your credit rating and fall into a hole of debt that is tough to dig out from.
3. Borrowing from Friends and Family
Some entrepreneurs choose to borrow money from their personal networks to finance a new business. You can either offer your friends and family equity in the company for their investment, or set up a plan to pay them back over time.
Crowdfunding is growing in popularity as how to finance a new business. Forbes cites that in 2014, the total global capital raised through crowdfunding was $16.2 billion. While crowdfunding offers a good opportunity to not only secure financing but also market your business, the "all or nothing" structure of some platforms can be debilitating to a business that invests all its resources in a failed campaign.
5. Traditional Bank Loans
Traditional bank loans are a popular option for many new business owners. Business loans make sense for many young companies because they can be paid back little by little over several years.
If your business needs to borrow less than $13,000 to get started, a microloan might be the answer. Microloans are available from specialized microlenders. Their interest rates are typically higher than traditional bank loans, but they can be more accessible for new companies with a limited operating history, according to Entrepreneur.
Federal, state, and local governments all offer different types of grants for new businesses. Grants can be set aside for certain groups (e.g., businesses owned by military veterans) or for certain purposes (e.g., repairs after natural disasters). The Small Business Administration lists many government grants on its website.
8. Venture Capital
Venture capital investments are typically made as cash in exchange for shares and an active role in advising the company. While many young businesses can benefit not only from the cash infusion, but the advice of a seasoned businessperson, some are not willing to give up the equity and control.
Joining forces with another individual who can contribute to the business financially can certainly have its benefits and alleviate the full financial burden from a single owner. However, be sure to have the proper legal paperwork drawn up before entering into any type of business partnership.
10. Invoice Factoring
Invoice factoring involves borrowing money on accounts receivable that have not yet been paid. In essence, you're taking an advance on that money before your customers with terms pay you. While invoice factoring can help businesses maintain a steady cash flow, it can be expensive, as lenders generally charge weekly fees until you are able to pay them back in full.
With so many ways to finance a growing business, you are certain to find the right fit for you!