About 33 percent of Americans have considered starting a small business. The only thing standing in their way? Capital.
Starting and running a business requires money. Without it, a business will grind to a halt.
If you’re among these people, you might be feeling helpless. Your entrepreneurship dream is in tatters because you don’t have the money to bring it to life.
Well, we have some good news!
Having no money of your own doesn’t mean you can’t find the funds to start your business. As long as you know where to look, raising capital shouldn’t be a big challenge.
In this article, we are sharing the various ways you can fund your small business.
1. Liquidate Your Personal Assets
If you’re like most aspiring entrepreneurs who have no money saved up, you probably haven’t considered selling your house. In fact, you’d rather give up on your business idea, than risk your house, right?
That’s not the spirit of a true entrepreneur. If you believe in your idea, you should be willing to liquidate some of your assets.
Own a house? You don’t have to sell it and move back in with your parents. Tapping into your home equity line of credit – assuming you’ve got positive equity in the property – for instance, is an ideal way to get the funds you need.
If you have a retirement account, don’t shy away from withdrawing or borrowing from it. Sure, this will be a major setback to your retirement plans, but look at the bigger picture. Your business could become successful, giving you enough money to start saving for retirement again.
The gist of this is don’t avoid liquidating your personal assets when necessary. Answering a call to entrepreneurship is all about doing whatever it takes.
2. Partner Up
Let’s say you need $50,000 startup capital, but all you have is $25,000.
What if you sold your idea to a close friend and asked them to come in as a 50-50 partner? As a requirement for partnering up with you, they’ll have to raise the remaining $25K.
This strategy has its challenges. For example, finding a partner with the amount of money you’re seeking can be difficult and partnering up might mean sharing the management responsibilities of the business. Another person might not always agree with some of your business decisions.
However, if you find the right partner, the business will have a better chance of succeeding.
An important thing to keep in mind when entering into a partnership is to create a sound partnership agreement. This is a legal document that details the roles, responsibilities, entitlements, and liabilities of each partner.
3. Borrow From Friends and Family
If you don’t like the partnership idea or no one is willing to become your partner, why not ask for a straight-up loan from friends and family?
It’s understandable that borrowing money from the people close to you might mean swallowing your pride, but this is business. Treat any potential lender like a bank or credit union. Present them with your business plan and let them see why you need the money.
Depending on the amount of money you need to start the business, you could approach one person or more. But regardless of the number, ensure you have a repayment plan in place. Money can fracture relations between even the closest siblings, so you don’t want to default on a loan from a family member or friend.
4. Get a Business Loan from a Lending Institution
Traditional banks, especially the large ones, have long had a reputation for not lending to small businesses, but things are improving. In 2019, small business loan approval rates at large banks hit record highs.
So, if you shelved your plans to apply for a business loan from your bank, now is a good time to give it a try. That said, you should be tactful with your borrowing.
Just because more and more banks are lending to small businesses doesn’t guarantee that your application will be approved. You need to make a solid application, complete with a detailed business plan. Also, do some research and identify the banks that are most likely to approve your application.
If you’ve got some assets, like a house, consider asset based lending. You will put up an asset as collateral, after which a lender will loan you an amount that’s at most equal to the market value of the asset.
Be careful with secured loans, though. If you default on the loan, your lender has a right to repossess the asset and sell it off. What’s more, you could still owe money if the asset fetches less money that your loan balance.
Besides traditional banks, try getting a business loan from alternative lenders, such as credit unions and online lending companies.
5. Get Equipment Financing
Are you starting a business that will use several pieces of large equipment? Maybe a small manufacturing facility or even a restaurant.
As you’ll realize, most of the startup capital will go into purchasing the equipment. Fortunately, you don’t have to worry about this. Most business lenders offer equipment financing.
Under this credit facility, a lender will purchase the equipment on your behalf, on agreement that you’ll pay them back over a certain period of time. Essentially, this is a secured loan. If you fail to pay the lender, they can seize the equipment. This can cripple your business operations.
When looking for an equipment financing company, consider the interest rate and repayment term.
Ideally, you want a lender who will charge you the lowest interest rate while allowing the loan to run for several years. You’ll end up paying a lot more than if you were to pay for the equipment in cash, but would you rather wait for several years to bring your business idea to life?
6. Find an Equity Investor
Do you watch the popular show “Shark Tank?”
It gives an opportunity for entrepreneurs to make a pitch to investors (sharks) and ask for an investment in exchange for an equity stake in their company. You can also find an equity investor to pump some money into your company.
Let’s be honest, though. Equity financing isn’t for everyone. If your startup doesn’t have high growth potential, no equity investor will want to invest in it. These investors want to get a share of a high-growth company in its early days and hold on to it, hoping the startup will one day go public or be acquired for millions.
If your company fits this description, you can start your hunt for an equity investor. You can send your pitch to individual investors or venture capital firms.
Equity financing is more preferable than debt financing because you’ve no obligating to pay back the money. However, you’ll have to give up a share of your company. The more money you need, the more equity you’ll have to surrender.
Every year, crowdfunding campaigns collectively raise billions of money.
You too can run a crowdfunding campaign and raise the money you need to make your dreams a reality.
The challenge is: how do you do it successfully? Because for every successful crowdfunding campaign, there are tons that don’t gain any traction at all.
Start by establishing a manageable campaign goal. If you need $100,000 to start your business, crowdfunding probably won’t work the magic – unless you’ve got a really ground-breaking innovation.
Next, craft a moving story for your campaign. Often, the difference between a successful and failed campaign is the campaigner’s ability to connect with readers and evoke their emotions.
Lastly, promote, promote, promote. The more eyes see your campaign, the more money you’re likely to raise.
8. Invoice Factoring
Invoice factoring is a financing option for entrepreneurs who already have an active business.
If you’ve already had some clients, you probably know how frustrating it can be to supply items that’ll be paid for at a later date. What will happen if you run out of cash before your clients pay up?
Here’s where invoice factoring comes in handy. A lender who offers this facility will fund up to 100 percent of your accounts receivable, at a fee – usually up to 3 percent of the value.
Start Raising Capital and Bring Your Dream to Life
Raising capital is part of every entrepreneur’s journey. You don’t have to shelf your ambitions if you are not able to self-fund your idea. We have fleshed out a number of strategies you can explore. Your task now is to find the ones that suit your needs.
All the best and keep reading our blog for more business and entrepreneurship insights.
- Pros and Cons of Financing a Business
- Understanding the Kinds of Capital for Your Business
- 12 Tips for Getting Your Bank Loan Approved
- Evaluating Financing Options for Your Business: Myths and Facts
- How to Raise Money to Finance a Franchise