Have you ever heard the phrase “You need money to make money.”?
To turn your incredible business idea into reality, you need a way to finance it. But the biggest mistake you can make when choosing finance is to think traditional, like bank loans. Although bank loans are one choice, they’re not the only choice.
There are many possibilities for financing your new business venture. There are options if you don’t have good credit or don’t have any money at all. Maybe you’re nervous about going into debt, or maybe debt doesn’t scare you at all.
Regardless of your situation, take a look at the following options to see what kind of financing exists for new businesses like yours.
Quick-Note: Financing a business starts with your business plan. It’s critical for you to plan your business out then look for the money needed to get started. And that’s where LivePlan comes in. LivePlan is a business planning software that gets you ready to pitch or look for funding.
No more asking yourself ‘What do I even say?’ because this tool walks you through the entire process. Try it risk free for 60 days with your exclusive 25% off discount. If you decide it isn’t right for you after 60 days, get a full refund.
This may be the easiest way to finance your new business – sell your assets. Do you own a car or have equity in your house? Maybe you have a 401K or retirement savings account? Think about the assets you own. Entrepreneurs have sold the majority of their worldly possessions (including house, cars, property, boats, etc.) to finance their business.
If you need a large amount of money, obviously you’ll need to sell your most valuable assets. However, if you plan on starting small, you can sell your personal items like furniture or jewelry.
If you truly believe you’ve got a great business idea and have made sure it will work, financing your business with your personal assets can be the easiest way to get your business off the ground.
The best answer is using assets to fund your new business is only right if you actually have assets. But besides the obvious answer, you also need to consider whether the asset is vital to your life and new business.
Selling your house to fund your new startup is extreme – and risky. Although you’re confident your new business will be a success, don’t part with any asset you can’t live without.
Small assets can be sold on eBay or Craigslist, pawn shops, lawn sales, or auctions. If you’re trying to liquidate large assets, hire a professional to help (accountant, realtor, financial advisor, etc.).
Depending on the asset, you’ll also need to know if it will impact your taxes. Plus, you may face some penalties or fees for accessing certain financial assets, like CD’s. Find out all the details before you decide to sell.
In a nutshell, trade credit is any time you take delivery of materials, equipment or supplies without paying cash on the spot. It’s a great system in theory, but it may 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.
But this doesn’t mean you can try and negotiate trade credit with suppliers. Try to speak directly with the decision maker directly. They may be willing to make specific arrangements or allow you to make payments over time.
This option will certainly cost more than paying cash upfront, as they’ll charge an additional fee for any trade credit situation. If you’re interested in a possible 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 get your business funded today.
Trade credit is great for established businesses. It’s much harder for new startups (but 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 right 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.
If you want to try to negotiate a trade credit agreement, first look at the company’s website and review their policies. Larger companies will probably have something clearly outlined and may not be open to negotiating with an unknown business. Smaller businesses may be more open to a negotiation with a new business, provided you’ve got a solid plan.
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 with the company.
Angel Investors are successful business people who are willing to invest hundreds of thousands of dollars in your business in return for a piece of the action. They’re looking for a great return on their investment and aren’t afraid to stick their noses into your business if they feel you’re not going in the right direction.
NBC’s Shark Tank is a great example of Angel Investing. Contestants give a quick pitch and try to sell the investors on their big idea. But the bottom line is profitability, not passion. You have to be passionate in your business, not your angel investor. They’re just looking to make a profit.
That’s not to say that Angel Investing is bad – it’s not. The process just has different parameters than other types of funding. Some specialize in the tech industry, restaurant, or manufacturing. They extremely knowledgeable of their industries, and can give you really good ideas and guidance with regards to product development, marketing, sales and so on.
It’s a good process for those who don’t mind giving up partial control of their business in return for financial backing.
If you want 100% control of your business, than Angel Investing is not right for you. Plus, it’s not for small, micro or solo businesses.
However, partnering with the right investor may be the answer if you’re comfortable receiving guidance along with your startup cash.
Here’s a few resources to check out if you think Angel Investing may be right for your business:
This option is certainly not for everyone. But if you have friends or family who are willing to invest in your new business, than this can be a great 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 are 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 (at twice as much as they invested, for example). The goal is to have everything written out in a professional manner, as if this was a business transaction – because it is.
Can borrowing money from a friend or family member be a huge mistake? Yes.
It can ruin friendships if you don’t pay it back, and you can damage family relationships. So be careful choosing this option as it can be more expensive than you realize – and not just financially.
If you’re ready to either ask for a loan or want to make it official, the first step is preparing a legal contract outlining your agreement. Either go to a local attorney, or create one using an online site like Rocket Lawyer.
Depending on your business plan, you may be able to have potential customers pay to launch your new business. This works especially well in service businesses.
Let’s say you’re a web designer. You use some networking contacts to reach out to potential customers. You sell them a package with at least a fifty percent deposit. You use that deposit to fund your initial startup costs.
You have to be a great salesperson for this one to work. You’ll have to be confident, trustworthy, and reliable. You may need personal recommendations.
Plus, you’ll need something tangible to show potential clients. But for the right types of businesses, this is a great option to get started without taking on any debt.
You can’t pull this off without having something to show any potential clients. One option is to do a handful of jobs for free. That way you’ll have pictures or tangible evidence of the work you’re capable of.
You could also create a presentation, website, brochure, etc. to highlight your services. The main point is to have proof that you’re the real deal – and not some wannabe.
Credit card companies can be considered legal loan sharks. You get sucked in with a good rate, and they jack it up anytime they want. Extra and hidden fees, selling debt to another company, and charging exorbitant late fees. It’s all legal.
Before you turn to plastic for financing consider the risk. You can get large amount of capital quickly, but the cons is 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. It 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.
Using credit cards is only a good funding option if you have decent credit. 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. They should also not be considered if you don’t think you’ll have short-term profitability – you’ll end up in a lot of debt if you don’t expect to make any sales in the near future.
If you’ve exhausted every other possible funding source, and want to use your credit cards to fund your new business, there are a few things to consider.
First, check out several credit card offers to get the best possible rates available to you and your situation. Secondly, make sure you’re able to pay the minimum every month, and try to create a strategy that pays off the balance monthly. Avoid getting slammed with interest and late fees at all costs.
Microbusiness lending is a relatively new phenomenon, with thousands of programs worldwide. Microfinance began in the 1970s when social entrepreneurs began lending money on a large scale to the working poor. Today, microfinance programs serve anyone who is unable to get a loan through a mainstream bank.
There are many different types of microbusiness lending, including programs from both profit companies and non-profit organizations. Each will have their own specific guidelines and payment policies. Most micro lenders also require borrowers to complete business training and business 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.
Microloans are generally for the self-employed or a microbusiness (0-5 employees). Microloan providers generally loan a small amount (some only provide a few hundred dollar loans), but the organizations are dedicated to providing support to microbusinesses.
Some provide free classes and guidance throughout the startup process. So they can be a great resource for small businesses.
Check out the following resources directly to see what types of options you’d qualify for. Also, there may be some women-based microfunding options available.
The bank is there to borrow money. Right? If you have superb credit, your bank may not question your loan. However, bank loans are one of the hardest loans 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 ideas. They just want the facts. You’ll need a solid business plan, and possibly collateral or assets. You have to know that regardless of whether or not your business is successful, you need to pay this money back or face bankruptcy.
Bank loans are good funding choices for anyone with good credit. You’ll probably be required to sign a personal guarantee, so it will impact your credit if you default. You’ll also need to jump through whatever hoops they require.
Not all banks are the same and have the same requirements. Check around for the best interest rates and payback requirements, and choose the best one for your situation.
Be prepared with a solid business plan and collateral.
Social lending is an internet-based funding source 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 it’s own unique process. Like other types of funding options, the investor is looking to make a profit.
However, there are a few non-profit lending sites, like Kiva, that connects entrepreneurs from around the world with socially conscious investors who lend for philanthropic reasons.
The main thing when approaching social lending, like every other funding option, is to do a lot of research upfront. But social lending is a great option for those who have limited funding choices.
Depending on the site, social lending loans can be very low. Kiva loans money in $25 increments, but can lend several thousand to a business. It’s not the same as crowd funding, which is gifting money not loaning money.
Like the majority of funding options, the key is to understand the details. Check the following resources to determine whether or not it’s right for your business.
Bootstrapping is an old phrase that means improving your situation by 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 alternative ways to fund your business.
For example, you choose to start extremely small and grow your business based on your profits (both Apple and Microsoft were founded in a garage). You could choose to learn marketing, accounting or any other entrepreneurial skill yourself instead of outsourcing.
It’s choosing to buy used, or leasing equipment. It’s not about being cheap, but a mindset to choose alternative options to build your business.
Another great way to bootstrap your business and raise money to finance it is to get a part time job in the early stages. It could be a local job in your area or freelance work online through platforms like:
Just keep in mind by doing this your business will not receive as much personal attention as it may need 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 don’t have to go into any (or as much) debt to finance your business. Which will leave you with a more clear mind at the end of the day.
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.
When you’re creating your business plan, even if you’re not creating a formal business plan, create it with bootstrapping in mind. There are a thousand ways to save your business time and money, and it all starts with looking at your options first. Don’t assume that the traditional way of doing something is the best way.
See where you can streamline and avoid debt at all costs. If something isn’t completely necessary, don’t buy it.
Funding is one of the biggest stresses for any new business. Not having enough money to survive the first few years obviously contributes to the overall failure rate. So funding is a huge issue.
It can be difficult to determine what funding choice is best for your new business. You don’t want to take out too much and not be able to pay it back. And you don’t want to go into unnecessary debt. This is a big decision for your business – on that could impact you for years to come.
Take the time to research every available funding source available to you. Ask questions. Make an informed decision. Because you want to focus on growing your business into something successful, and not on poor funding choices.
A business’ cash flow is the blood of every business. Without it, your business dies. That is why it is very important that you have a hold on your personal AND business finances at all times. Cash flow documents should be created and could determine whether or not you are qualified to receive a business loan. Above all, you’ll most likely need a business plan to get through the door.
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 also for determining fixed and variable expenses your business may foresee in the future.
Fixed expenses and variable expenses are two separate financial categories and both are essential to an operating business. Fixed expenses include rent, utilities, administrative and insurance costs. While variable expenses refer to inventory, sales commissions, shipping, packaging or any costs directly associated with product or service sales.
For business owners who are exploring financial options to fund your first business should understand that every business is different and will have specific budgeting guidelines at each stage of the business’ development. There is no secret formula for measuring an exact amount of seed money you will need to get your startup off the ground.
Some businesses will be able to get off the ground with a relatively small amount of money while others may require a much greater amount, considering any additional building renovations or top of the line equipment that may be needed.
A good way for first timers to estimate how much seed money they will need for their first business is by creating a mock financial spreadsheet for the cash flow of what two months of business may look like during actual operation. Keep in mind that some expenses, especially for a brand new business, will be one-time costs for things like a license fee or to pay for a building marquee sign.
You will 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.
It’s very important to have a detailed and down to earth copy of your budget if you are planning on borrowing money from a lender to cover costs during the first stages of your business (LivePlan is an excellent tool for doing so).
Borrowing startup funds is one of the most common ways first time entrepreneurs just like you get the funding they need. However, lenders are tough with their selections and getting them to say yes to even the smallest loan isn’t always easy.
Before you start looking for a lender, it’s best to always do your research on who may be the most approachable lender for your business. You should also understand some of 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 a current credit history report and a solid plan for your business.
They will also want to know if you have any equity or collateral to go toward the amount you are asking for and what your experience is within the industry.
It cannot be stressed enough how important it is to check your personal credit history if you are approaching a lender for a loan, especially if you have not yet established a business credit history. (If you have not yet established a business credit history, a bank lender will use your personal credit report to determine your eligibility)
Also, you should be prepared for any questions the lender may ask you about your business, as your answers the result of their decision. For example, a lender might ask a first time business owner about cash flow and if or not, it is greater than debt.
They might also ask how you plan to pay for the loan if the business fails, how you plan to control expenses and what is the probability of increasing profit related to your business’ industry.
Everything that is left over after all of your costs have been paid for at the end of the week, month, or year is what will qualify as your profit, or breakeven analysis. If you are eligible to receive a business loan, payments should be calculated out before you add up any profit.
The breakeven mark is reached when a business’ revenue surpasses all fixed and variable costs. To estimate your breakeven analysis you may use the following mathematical equation:
Fixed Costs (divided by) [Unit Selling Price – Variable Costs] = Breakeven Amount
If your breakeven analysis numbers are higher than outflow numbers, banks will generally be more comfortable funding your first business.
If you need additional help in initiating loan approval or evaluating your credit report, it would be a great idea to speak with the nearest lending representative or ask your accountant for more information.
Liesha Petrovich and Ryan James are passionate entrepreneurs on a mission to simplify entrepreneurship through your journey as a business owner.
You don’t need to spend $100,000 on an MBA or have any prior experience to start your business today. All you need are core fundamentals, a formula for success, and a bucket of elbow grease.