How to Finance Your Startup

If you have an idea for a business, one of the most frustrating parts of getting started can be securing the capital you need to begin your operations. For the first-time business owner, financing can also be frightening, as it involves taking on tens or even hundreds of thousands of dollars in debt. Luckily, there are many different options for the beginning entrepreneur to finance his or her startup.

Traditional Business Loans

Probably the most familiar financing option to most people, traditional business loans have been around since the earliest days of the finance industry and have helped countless entrepreneurs start their companies. Business loans come in many shapes and sizes, with terms that can range from 5 to 30 years. Most business loans will have interest rates around 7 percent, though this can vary based on the amount of the loan. Business loans have the advantage of relatively low interest rates, but they can be difficult to secure because of the large risks banks take on by lending the money.

Peer-to-Peer Loans

With the advent of the internet, many industries have changed drastically, including finance. One of the biggest innovations of the last several years has been peer-to-peer lending, a system in which individual investors collectively pool their money to extend loans and then collect the interest. Though these loans are very popular for individuals, particularly for debt consolidation, they can also be used to finance business ventures. The advantage of peer-to-peer loans is that they typically have lower interest rates and can, in some cases, be easier to get than a loan from a bank.

Crowdfunding

Another great way to get your business off the ground is through the process of crowdfunding. Crowdfunding involves large groups of people contributing to your business individually through a funding platform, such as the well-known Kickstarter. If you run a crowdfunding campaign, you will need to be able to give those who contribute something in return. Often, entrepreneurs will promise contributors a free product or service once the business is up and running.

Another type of crowdfunding, also known as equity crowdfunding, is also an option. Unlike normal crowdfunding, which is made up of ordinary people contributing resources to help develop an idea they like, equity crowdfunding opens the process up to investors. With equity crowdfunding, those who contribute to your startup will effectively become shareholders, though the process will not require you to list your company on a stock exchange. If you need larger amounts of capital and are willing to share your profits with those who provide it, equity crowdfunding can be a good option.

Friends and Family

Depending on the size of your envisioned business, the financial situation of your friends and family and your willingness to ask them for money, it may be possible to finance your startup with loans from people you know. This approach has both advantages and disadvantages. While you will almost certainly secure lower interest rates from people you know than from formal lenders, a loss of money related to business failure may put close personal relationships at risk. If your business succeeds, you may also find the people who lent money to you wanting to take a more active role in it in order to profit from your work. Weigh the risks and benefits carefully, and explore other options before turning to this one.

Private Investors

If your business idea is something with the potential to grow into a large enterprise or to disrupt an industry, you may be able to secure capital from private investors or venture capitalists. In order to do this, you’ll need to be able to pitch your business quickly and make someone else understand why it’s important and profitable. Keep in mind that venture capitalists are approached by hundreds or thousands of would-be entrepreneurs every year, so do everything you possibly can to set yourself and your business idea apart from the pack.

Fund Your Business With Home Equity

One of the common ways small business owners find the funds to get started is by using home equity loans. This approach can be risky, as it puts the entrepreneur’s private property on the line as part of the business venture. However, because it is a loan based on an existing asset, this type of funding is also very easy to secure, provided you own a home that can be borrowed against. Ideally, entrepreneurs who use this method to raise capital should borrow as little as possible against their homes and should repay the loan quickly. Paying off your loan sooner than required will both save you money in interest payments and take the burden of a mortgage off your shoulders.

Draw On Retirement Savings

One of the riskiest but also one of the easiest methods for financing your business is to use retirement savings that have been put away in a 401K, IRA or employee stock ownership program. This method is excellent in the sense that it involves you using your own money and therefore comes without interest payments or parties to pay back. However, it does involve risking the savings you’ve put together for your retirement years in your business. Whether or not this is a good option for you will depend entirely on the size of your retirement account and how risk-tolerant you are.

Financing your startup is one of the most difficult parts of getting started in business. Ultimately, you should accept that there will be financial risk involved with any funding method. Which one is the right option for you will depend on your circumstances, your current financial situation and how much money your startup needs to get off the ground. Explore each financing option and weigh the pros and cons to settle on the one you feel best fits the needs of your future business.