When financing a small business, sometimes you have to get creative.
Whether you’re borrowing money that you will have to pay back or selling partial ownership in exchange for funds, weighing your financing options can be tough.
Available financing options will depend on the stage of your business, how much you are looking to borrow, and for what purpose.
So, how should you fund your business? Keep reading and we’ll try to help you select the right solution for your needs.
Tips for Financing a Small Business
When deciding how to finance your business, you have to think about the pros and cons of each option. It’s an important decision, as each one could impact you and your business in many ways.
You should decide how much you can afford to pay on a loan before looking at options. Setting your expectations can be helpful when narrowing down the best choice for your business.
Can’t afford to pay as much as you thought? There is likely still a route for you to take.
Let’s go over 10 hacks that you can use to finance your small business today.
1. Use Your 401(k)
It can be risky to dip into your 401(k) to fund your business, but that doesn’t stop people from doing it.
401(k) loans allow you to take cash out of your retirement account and put it into your business. This is a viable option for those who do not want to take on debt. Plus, you aren’t subject to a credit check when you’re looking to borrow your own money.
The IRS does have rules, though. You can only borrow $50,000 or half of your vested balance – whichever is less – in any given year.
The loan must be repaid in 5 years and a payment plan is set up at the time you borrow the cash. You have to make payments at least quarterly, but you can explore other options.
Be careful. It can be difficult for entrepreneurs to secure enough money for retirement, so you don’t want to lose what you have already saved.
If you think it is worth the risk, using your 401(k) to fund your business could be your ticket to success.
2. Ask Family and Friends
When all else fails, asking family and friends for help is a good way to fund your small business.
The people in our lives want us to succeed, so if your family and friends support your business, they will likely be willing to help. Ask them if they would invest to help your business succeed.
Just because the loan is coming from someone you know doesn’t mean you shouldn’t treat it like every other investment. Set parameters and terms in writing to reduce the chance of miscommunication.
Keep in mind that they are trusting you with their financial future, so think it over before you go this route. Always be honest, because risky business dealings can ruin even the closest relationships.
3. Consider Crowdfunding
$5 donations here and $10 there may seem like nothing, but if you are able to secure a few hundred of those pledges, the possibilities are endless.
Crowdfunding platforms allow you to blast your finance needs to your network. If your contacts are willing to contribute, the platforms give them an easy way to invest in smaller amounts.
To launch a successful crowdfunding campaign, you have to share your story. Potential funders like to see that you’ve put some true thought into your business. This honesty adds credibility to your project.
If your campaign goes viral, you may end up surpassing your financing goal with outsider contributions.
Crowdfunding can be fun, but also a waste of time. Kickstarter, a popular crowdfunding platform, reports that less than 40% of their projects are successfully funded.
4. Find an Angel Investor
If you’re looking to speed up the growth of your small business, you need to find a lot of capital. Luckily, there are plenty of investors searching for worthy businesses to fund.
Angel investors are those that invest their own money. They are usually successful, well-off professionals that have a lot of expertise to share.
Many investors specialize in a certain industry or business model. So do your research before making any introductions.
While angel investors used to be hard to find, that is no longer the case. There are now entire groups formed by angel investors and organizations dedicated to connecting them to entrepreneurs.
The SEC requires that individual investors are accredited. So, it’s important to guarantee that an individual is accredited before making any asks. It’s always a good idea to run each investment by your lawyer before accepting.
5. Get a Business Term Loan
The most traditional way to secure capital for your business is to head to the bank for a business term loan.
Loan amounts differ depending on the lender, loan type, and borrower, so no two loans are the same. A term loan can help you access money quickly if you are in a pinch and need to cover payroll or pay the rent. Typically, payment terms are longer than for short-term loans.
A business term loan deposits an amount of money directly into your bank account. You will be required to pay back that loan amount – and interest – over a specified period of time.
The repayment term length is usually 1 to 5 years long, with a maximum loan amount of $500,000.
You can usually get more cash from banks than you can online, so bank loans are good for financing large, one-time projects.
You should qualify for a business term loans if you have been in business for a few years, have good credit, and you’re making money.
Because of longer repayment periods, business term loans often place more importance on credit score than short-term loans.
But don’t be discouraged if your credit score is less than average. More than half of the small business loan applications were approved by small banks in November of 2018. At the same time, funding request approvals at big banks reached rates that haven’t been seen since the Great Recession.
6. Look Into an SBA Loan
The Small Business Administration (SBA) can be a great resource for small business owners. The SBA is a federal agency that supplies entrepreneurs with access to funding to improve small businesses.
These funds are used for working capital, expansion, and equipment purchases.
The SBA doesn’t actually finance the loan but assists in securing financing for your business. It sets guidelines for loans which reduces risk for lenders. This makes it easier for them to access capital. In turn, it’s easier for small business owners like you to get loans.
The rates and terms of SBA loans are often more manageable and less intimidating to borrowers. Common SBA loan terms span from 5 to 25 years and the average loan amount was about $425,500 in 2018.
In some cases, the SBA also offers continued support through counseling and education that will help you maintain your business over time.
Keep in mind that the process to apply for an SBA loan can take months, and the government doesn’t select every small business for funding. This isn’t the best option for you if you need money quickly.
7. Use a Credit Card
If you’re responsible, using a credit card to occasionally fund your business ventures is not a bad idea.
The process for applying for a credit card and receiving approval is fast. In some cases, you can have a decision and start using the card within minutes.
Most personal credit cards allow you to use associated rewards programs. This may match your spending patterns better than business card issuers.
Be careful not to max out your personal credit card. This can hurt your chances of applying for and receiving additional financing elsewhere. You can negatively impact your personal credit score by racking up your bill with business charges.
You also don’t want to mix personal charges with business purchases. It’s complicated to go through statements and separate personal charges from business ones.
There are also credit cards that are only issued to businesses. Business credit cards offer a revolving line of credit, which is helpful when you are experiencing unpredictable cash flow.
Business credit cards are not the way to go if you need actual cash. They will usually charge a fee for cash advances, which are also subject to high interest charges.
8. Explore Equipment Financing
Equipment loans are similar to car loans – the amount you can borrow and the terms of the loan depend on the equipment you are purchasing. Lenders are more generous with equipment loans because you are purchasing collateral.
If your primary reason for seeking financing for your business is to purchase equipment, this could be the best way to go.
If you’re still testing your business model, you might consider leasing your equipment instead of buying it outright. It can be a relief to know you don’t have to worry about equipment maintenance costs. This also allows you to upgrade or add to your equipment as your business grows.
Equipment loans typically come with a fixed interest rate and term length, so you will have the same payment each month. You can secure equipment loans even if you have bad credit, but be prepared for slightly higher rates.
9. Pledge Future Earnings
Another way to finance your business is to pledge a percentage of your future lifetime earnings in exchange for funding. This process is risky for investors but can be rewarding if they bet on the right company.
By using broad-based statistical data, this model attempts to determine your personal income over the life of a contract.
In this scenario, the relationship between the investor and borrower is very personal. Gambling with your future income is more intimate than exchanging part of your company for an initial investment.
These personal loans can provide fast cash, but tend to require an average or better credit score and steady annual income.
10. Use Your Own Savings
The easiest way to finance your business is to use your existing savings.
If you were planning ahead, you would have saved money specifically to fund your business. This is the safest and most conservative way to invest in a company, but it is not always the most realistic solution. And let’s face it, you can only save so much.
As an entrepreneur, it’s important to carefully weigh decisions that can impact your monetary future. You always want to have something to fall back on.
While using your own money and funding your business debt-free is an attractive option, you should never put yourself or your family at risk. After all, only about half of small businesses survive after five years.
What Are You Waiting For?
Financing a small business is only as daunting as you choose to make it.
Each business has a unique vision, so it makes sense that financial solutions vary with them. There is no right or wrong way to secure financing.
Whether you need new inventory, new equipment, or wish to buy out a business partner, there are specialists waiting to put together a custom solution for you.
Apply now to be pre-approved for up to $500,000 funding in as little as a few minutes! The application process is two simple steps, and you will receive a copy of our free e-book to get you started.
Not ready to start the process? Check out our other resources created to help business owners like you to stay informed.