Yes, it's true, you need money to make money.
To turn your incredible business idea into a reality, you need a way to finance it. But don't just think traditional, like bank loans-- there are plenty of ways to go, even if you don’t have good credit or any cash on-hand. Maybe you’re nervous about going into debt, or maybe debt doesn’t scare you at all.
Regardless of your situation, you owe it to yourself and your business to explore the possibilities below.
Quick-Note: Financing starts with your business plan. It’s critical for you to plan first, then look for funding when you know what you're doing and what you need. That's where LivePlan, a business planning software that makes it much easier to get down to specifics, comes in.
Option 1) Sell Your Assets
Selling assets may be the easiest way to finance your new business. Do you own a car or have equity in a home? Maybe a 401K or retirement savings account? Think about the assets you own. Countless entrepreneurs are willing to sell the majority of their worldly possessions to finance their businesses.
If you've taken the time to validate your idea, financing your business with your personal assets may be the easiest way to get your business off the ground.
Is SELLING ASSETS RIGHT FOR YOU?
Well, do you have assets you can part with? Consider whether your assets are vital to your life and new business. Selling your house to fund your new startup might be too extreme-- and risky. Even if you’re confident your new business will be a success, don’t part with any assets you can’t live without.
Ways to Sell
Small assets can be sold on eBay or Craigslist, or at pawn shops, lawn sales, or auctions. If you’re trying to liquidate large assets, hire a professional (accountant, realtor, financial advisor, etc.) to help. You’ll need to find out if selling any assets will impact your taxes, or if you'll face any penalties or fees. Get the details before you decide to sell.
Option 2) Trade Credit
In a nutshell, trade credit is any time you receive materials, equipment or supplies without paying cash on the spot. It’s a great system in theory, but it can be difficult to convince suppliers to offer you trade credit. They may require you to pay for every order upfront until you’ve established you can pay your bills on time. Try to speak directly with the person in charge who may be willing to make specific arrangements for you.
This option will certainly cost more than paying cash up front, since there's always an extra fee. If you’re interested in using trade credit with a supplier, all you have to do is ask. The worst that can happen is they’ll say no; the best that can happen is you'll get your business funded.
IS TRADE CREDIT RIGHT FOR YOU?
Trade credit is great for established businesses. It’s much harder for new startups, although it can be done. If you don’t pay the money back on time, you could be sued and it could impact your credit.
Trade credit is only a good idea if you have a solid business strategy that ensures the money can be paid back. That means you already have customers willing to buy, not just a list of potential leads.
WANT TO TRY A TRADE CREDIT ARRANGEMENT?
If you want to negotiate a trade credit agreement, first look at the company’s website and review their policies. Larger companies will probably have something outlined and may not be open to negotiating with an unknown business.
Smaller brands may be more open, provided you’ve got a solid Business Plan to show them. Ask for a small order, pay them back on time, and then try to negotiate for a larger amount when you’ve built a relationship.
Option 3) Angel Investors
Angel investors are successful people willing to invest big bucks into ideas for a piece of the action. They’re looking for a great ROI and aren’t afraid to stick their noses into your business if they feel you’re not going in the right direction.
NBC’s show Shark Tank is a great example of angel investing in action. Contestants give a quick pitch/presentation and try to sell the investors on their big idea based on numbers, projections, and strategy. In Shark Tank, profitability trumps passion. Sure, you have to be passionate about your business, but your angel investor doesn't. They’re just looking to turn a profit and add to their income streams.
That’s not to say that angel investing is bad. The process just has different parameters than other types of funding. Some investors specialize in restaurants, manufacturing, or tech. These investors are extremely knowledgeable of their industries and can give you great ideas and guidance with regards to product development, marketing, sales and so on.
Angel investing is a good idea for those who don’t mind giving up partial control of their business in return for financial backing.
IS ANGEL INVESTING RIGHT FOR YOU?
If you're a small or solo business, or you want 100% control, angel investing isn't for you. However, partnering with the right investor may be the answer if you’re comfortable receiving guidance along with your startup cash.
READY TO GET STARTED WITH ANGEL INVESTING?
Here’s a handful of resources:
- Angel Capital Association Directory (mostly for the U.S. & Canada)
Option 4) Family & Friends
This option is certainly not for everyone. But if you have friends or family willing to invest in your new business, this can be a decent option. Your friends and family love you and want you to be successful. However, there are a few pitfalls to avoid at all costs.
- Lending money to a friend or family member is a business transaction, not a personal one, so it’s crucial to put everything in writing.
- Make it perfectly clear how much money they're lending, and how you’re going to pay them back. Some may want a percentage of your profits. If this is the case, stipulate that you have the right to buy them out (for twice as much as they invested, for example).
IS BORROWING FROM LOVED ONES RIGHT FOR YOUR BUSINESS?
Can borrowing money from a friend or family member be a huge mistake? Yes. It can ruin or damage relationships if things go bad for a variety of reasons. Be careful if you choose this option, as it can be more expensive than you realize.
READY TO MAKE IT OFFICIAL?
If you’re ready to ask for a loan or make one official, the first step is preparing a legal contract outlining your agreement. Go to a local attorney, or create one using a service like Rocket Lawyer.
Option 5) Customers
Depending on your business plan, you may be able to have potential customers pay for the launch of your new product/service. This works especially well in service businesses.
For example, let’s say you’re a web designer. You could use some networking contacts to reach out to potential customers and sell them a package with at least a 50% deposit. Then, use those funds for the launch. Simple.
IS LEVERAGING CLIENTS RIGHT FOR YOUR BUSINESS?
You have to be a great salesperson for this one-- confident, trustworthy, and reliable. You may need personal recommendations. For the right businesses, this is a great option for getting started without taking on debt.
READY TO CREATE A PRESENTATION FOR POTENTIAL CLIENTS?
You can’t pull this off without having something to show potential clients. Do a handful of jobs for free so you’ll have pictures or other tangible evidence of the work you’re capable of. Create a presentation, website, brochure, portfolio, etc. to highlight your services. Have proof that you’re the real deal!
Option 6) Credit Cards
Some consider credit card companies legal loan sharks. You get sucked in with a good rate, and they jack it up anytime they want. Hidden fees, selling debt to another company, charging exorbitant late fees-- and it’s all legal. Before you turn to plastic for financing, consider the risk. The interest alone can eat you alive.
So if you're going to borrow money on your credit cards, plan to pay it back quickly. Credit can save you in a financial pinch or keep your business alive for a few months, but it’s extremely expensive in the long run. This is probably the most risky long-term option.
ARE CREDIT CARDS A GOOD FUNDING OPTION FOR YOUR BUSINESS?
Credit cards are a decent funding option if you have good credit and expect short-term profitability. Those with poor credit will either be outright rejected or be subjected to ridiculously high interest rates. Using a credit card should be considered a last resort, as bank loans offer much lower interest rates.
CONSIDERING CREDIT CARDS AS A FUNDING OPTION?
If you’ve exhausted every other possible funding source and want to use credit cards to fund your new business, check out several credit card offers to get the best possible rates. Also, make sure you’re able to pay more than the minimum every month. Avoid getting slammed with interest and late fees at all costs.
Recommended: Read our review of the best business credit cards.
Option 7) Microloans
Microbusiness lending is a relatively new phenomenon, with thousands of programs worldwide. Microfinance began in the 1970s when social entrepreneurs started lending money on a large scale to the working poor. Today, microfinance programs serve anyone unable to get loans through mainstream banks.
There are many different types of microbusiness lending, including programs for profit companies and nonprofits. Each will have its own specific guidelines and payment policies. Most microlenders also require borrowers to complete business training and seminars before receiving the loan-- and you’ll certainly have to develop a solid business plan. Choosing the right microlender can be challenging, so be sure to research the best one for your specific business needs.
ARE MICROLOANS RIGHT FOR YOU?
Microloans are generally for the self-employed or microbusinesses (0-5 employees). Microloan providers generally loan small amounts (some only offer a few hundred dollars), but the organizations are dedicated to providing support for microbusinesses. Some also provide free classes and guidance throughout the startup process, which can be great resources for small businesses.
WANT TO APPLY FOR A MICROLOAN?
Check out the following resources directly to see what types of options you’d qualify for.
Option 8) Bank Loans
The bank is there to borrow money from, right? But surprisingly, bank loans are one of the hardest types to get.
The banker you’re talking to has to believe your loan can be repaid. Their job literally depends on making sound business decisions. If you default, it reflects badly on him or her. They don't care about the fact that you have an amazing business idea. They just want the facts (like on Shark Tank). You’ll need a solid business plan, and possibly collateral or assets. And remember, you'll have to pay the money back or face bankruptcy if you're unsuccessful.
IS A BANK LOAN THE RIGHT CHOICE FOR YOUR STARTUP?
Bank loans are a fine funding option for anyone with good credit. You’ll probably be required to sign a personal guarantee, which means it'll impact your credit if you default. You’ll also need to jump through whatever hoops they require.
READY TO APPLY FOR A BANK LOAN?
Not all banks have the same requirements. Shop around for the best interest rates and payback requirements, and choose wisely. Be prepared with a solid business plan and collateral!
Recommended: Read our review of the Best Banks for Startups and Entrepreneurs.
Option 9) Social Lending
Social lending is internet-based funding where individuals can apply for loans from other individuals. It’s a peer-to-peer system, instead of a traditional consumer-to-business process. There are many different social lending sites, and each has its own unique process. Like other types of funding options, the investor is typically looking to make a profit.
However, there are a few non-profit lending sites. Kiva connects entrepreneurs from around the world with socially conscious investors who lend for philanthropic reasons. Like every other funding approach, do a lot of research up front before committing to anything. Social lending a great option for people with limited funding choices.
IS SOCIAL LENDING RIGHT FOR YOUR BUSINESS?
Depending on the site, social lending loans can be very low. Kiva loans money in $25 increments, but can lend as much as several thousand to a given business.
Keep in mind that it's different than "crowd funding," which is gifting money, not loaning it. Often with crowd funding, all the money is given back to the investors if the idea ends up lacking sufficient funding.
READY TO TRY SOCIAL LENDING?
Like the majority of funding options, the key is to understand the details. Check the following resources to determine whether or not social lending is right for your business.
Option 10) Bootstrapping
Bootstrapping is an old term that means improving your situation through your own efforts-- "pulling yourself up by your bootstraps." It’s part DIY and part strategy. It’s finding non-traditional ways to structure your business and look for funding.
For example, you can start extremely small and grow your business based on profits (Apple and Microsoft were each founded in a garage).
Choose to buy used, or lease equipment. It’s not about being cheap, but thinking about alternative options for building your business. Another great way to bootstrap your business is to get a part-time job in the early stages. This could be a local job, or online freelance work through platforms like:
Just keep in mind that by doing this your business may not receive as much personal attention as it needs to get off the ground. It’s very important to keep your top priorities in mind so you’re still making progress on a daily, weekly, and monthly basis. The plus side to this kind of financing is that you might not have to go into debt.
IS BOOTSTRAPPING RIGHT FOR YOUR BUSINESS?
Bootstrapping is right for all businesses. Again, it’s not about being cheap-- it’s about strategically designing your business to be cost-effective. Everyone can bootstrap, but the level of bootstrapping will vary.
READY TO BOOTSTRAP YOUR NEW BUSINESS?
When you’re creating your business plan (even if it's informal) create it with bootstrapping in mind. There are a thousand ways to save time and money, and it all starts with looking at your options first. Don’t assume the traditional way of doing something is the best. See where you can streamline, and avoid debt at all costs. If something isn’t completely necessary, don’t buy it.
Which Is Best For You?
Funding is one of the biggest stressors for any new business, and it can be difficult to determine what funding choice is best. This is a big decision for your business, and one that could impact you for years to come.
Take time to research every available funding source. Ask questions and make an informed decision!
Cash flow is the blood of every business. Without it, your business dies. That's why it's critical for you to have a hold on your personal/business finances at all times. Cash-flow documents will help determine whether or not you're qualified to receive a business loan.
CASH IS KING
A balance of cash inflow (sales of goods or services) and outflow (necessary business expenses such as marketing, employees, equipment, or business loan payments) is important when determining fixed and variable expenses.
Fixed expenses and variable expenses are two separate but essential financial categories. Fixed expenses include rent, utilities, insurance and administrative costs, while variable expenses refer to inventory, sales commissions, shipping, packaging, and any other costs directly associated with your sales.
FIND YOUR FORMULA
Every business is different and will have specific budgeting guidelines at each stage of development. There is no secret formula for measuring the exact amount of money you'll need to get off the ground.
A good way to estimate how much seed money you'll need is to create a mock financial spreadsheet of the expected cash flow for your first two months in operation. Keep in mind that some expenses will be one-time costs.
You'll also need to factor in ongoing costs for utilities, inventory, rent and insurance. Try to only calculate expenses that are realistic and essential. Your startup business budget should only include the necessities.
Note: It’s very important to have a detailed and down-to-earth copy of your budget if you're planning on borrowing money to cover costs during the early stages of your business (LivePlan is an excellent tool for this).
Borrowing money is one of the most common ways that first-time entrepreneurs like you get the funding they need for their startups. However, lenders are tough with their selections and getting them to say yes to even the smallest loan isn’t always easy.
DO YOUR RESEARCH!
Before you start looking for a lender, do your research on who may be the most approachable. You should also understand the factors a lender will use to evaluate your proposal. Banks and lenders will want to see concrete proof of your ability to pay back the loan, as well as your credit history report and a solid business plan. They'll also want to know if you have any equity or collateral to go toward the amount you are asking for.
The importance of checking your personal credit history before approaching a lender can't be stressed enough. If you haven't established business credit, your personal credit is what they'll use to determine your eligibility.
Point here is, funding's out there. Options are available. It can be done, but regardless of which option you choose it's going to take hard work and commitment. Here's to a prosperous year ahead!