12 Ways to Fund Your Small Business
Many businesses take months or even a few years to turn a profit. Plus, small businesses often take a substantial amount of money just to get off the ground. So where can this money come from? Check out 12 ways people fund small businesses to help determine which is right for you..
Consider the risk
Before we jump into the funding methods, please note that some of these sources increase the risk to your personal finances significantly. Many business owners are risk takers, but that doesn’t mean you shouldn’t carefully consider the risk and your capacity to handle it before choosing to add on risk.
- Personal Savings
This one is my favorite method of funding a small business. However, there are some “buts.”
- But it may not be enough.
- But you may need to keep some savings for other things, like emergencies.
- But you may not want to tap into your retirement savings.
- Friends & Family
Reaching out to friends and family is a popular source of small businesses, but this one comes at a risk beyond financial risk. If things don’t work out well or if the friend or family member gets impatient about getting a return on their investment, there can be an unpleasant change to the nature of your relationship. Certainly don’t accept money from friends and family if doing so could place them in a precarious financial situation if the business fails.
The SBA backs loans that lenders can provide for business start ups and ongoing businesses. The approval process can be lengthy, but interest rates are typically lower than you would otherwise get from banks and credit unions.
- Business Loans
Business loans from banks, credit unions or other financial institutions often require a detailed business plan and they’ll typically have higher interest rates than SBA-guaranteed loans.
- Personal Loan
If you have good credit and the means to repay, a personal loan from a financial institution can be a good source of funding.
- Home Equity Line of Credit or Home Equity Loan
Generally this is not a funding method I recommend. Funding a business by borrowing money against a home you own places the home at risk. A failed business could mean the loss of the home.
- Credit Cards
Credit cards are another method of small business funding that I generally don’t recommend, but is a common funding source. Credit cards often have high interest rates. With a business, it can be easy to just keep charging to stay afloat. This can lead to excessive debt and possibly eventually impact your credit or worse.
- Online Lending
This is a broad category. Some options are essentially online banks and financial institutions. Another option is peer-to-peer lending, when you borrow from others who are trying to make money by providing loans. The interest for these loans tend to be high compared to bank and credit union business loans and personal loans.
Often with this method you simply ask people to donate money for your business startup and perhaps you offer a small gift in return. You could also offer equity in the company.
- Community Development Loans
Sometimes state, and local governments will offer or back loans to help develop a community, and some of these loans are for businesses. Many community development programs include the use of federal funds, and funds usually have to be used to develop within a specific zone or neighborhood.
- Angel Investors
Some wealthy investors offer funding for business ventures in exchange for equity or perhap another arrangement.
- Borrowing From Your 401K
Borrowing from your retirement savings to fund your small business is generally best avoided. Some people like borrowing from their retirement plan because they feel like they are paying themselves back. But you lose out on the gains those investments would have made if they were still in the account. Plus, you could have negative tax consequences if you aren’t able to repay or if you don’t repay before you leave the job allowing you to contribute to the 401k.
Jerry Zeigler is a Navy veteran who serves service members with financial counseling and education. As an Accredited Financial Counselor®, he is a member of the Better Financial Counseling Network and is the owner of JZ Financial Management. As a tax professional and Enrolled Agent, he has a passion for helping taxpayers navigate taxes.