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| Creative Financing Methods |
So what's a would-be small business owner to do? There are plenty of other options to help you fund your new venture. Here are 14 options beyond bank loans for financing your startup.
"Home equity loans are very cheap, rate-wise," said Al Engel, executive vice president of consumer lending at Valley National Bank. "It is a low-cost form of borrowing that is very controllable by the entrepreneur as far as when he pays funds and redraws funds. The flexibility is tremendous. The risk is, you are putting your home on the line. If the business fails, or you fail to maintain the terms and conditions of the home equity loan or line, you risk foreclosure."
Selling assets. Sometimes, you may have a financing method and not even realize it at first. That was the case for entrepreneur Hamid Saify, who was able to fund his opinion-sharing community, ChoicePunch, by selling a car he had wanted to pass along to his children. Though it was a tough decision, Saify was able to make $30,000 from the sale of the car. That money, in turn, went toward some very important aspects of the fledgling startup.
"I used some of that money to help with the last payments to our design and development contractors," Saify said. "The rest I put into our account and used to help support marketing during our beta launch months."
Credit cards. Business credit cards are among the most readily available ways to finance a startup, and can be a quick way to get your business up and running.
"One of the few advantages is that the minimum payment on a credit card is very low," said Ken Nickel, senior vice president of community lending at Valley National Bank. "If you are a new business who is just starting out and you don't have a lot of money coming in, or you don't have a ton of expenses, you can put it on a credit card and pay the minimum payment."
However, there are some serious drawbacks to consider before using plastic to fund your startup, Nickel said. If a new business gets started and then has trouble making the payments, the interest rates and costs on the cards can build very quickly, and carrying that debt can be detrimental to a business owner's credit.
Angel investors. Those looking to finance their business can always look to an angel —an angel investor, that is. Angel investors have helped to start up many prominent companies, including Google, Yahoo and Costco. This alternative form of investing generally occurs in a company's early stages of growth, with investors expecting a 20 to 25 percent return on their investment.
"The principal advantage of an angel investor is generally that you have a friendlier atmosphere and a quicker decision-making circumstance for a smaller amount of [money]," said Mark DiSalvo, CEO of private equity fund provider Semaphore. "You are likely to get an investor who has strategic experience, so they can provide tactical benefit to the company they are investing in."
Venture capitalists. For small businesses that are beyond the startup phase and already have revenues coming in, a venture capital investment may be appropriate. Fast-growth companies with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company quickly.
Brian Haughey, assistant professor of finance and director of the investment center at Marist College, said that because venture capitalists focus on specific industries, they can generally offer advice to the entrepreneur on whether the product is going to fly or what they need to do to bring it to market. However, venture capitalists have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window.
"They have to make a return and usually have a five-year time horizon," Haughey said. "If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you."
Winning a contest. Sometimes, businesses can benefit from a bit of luck. That was the case for Roberto Torres and Luis Montanez, who funded a portion of their startup costs for apparel company Black & Denim with winnings from a business-plan competition.
"We utilized the funds to purchase manufacturing equipment that allowed us to scale our products and meet demand," the owners said. "This advantage gave us the opportunity to increase our production and get into bigger players like Stein Mart and Walt Disney World. The competition also gave us access to business experts that asked us the tough questions while allowing us to retain our equity —a perk that would have been very difficult to obtain otherwise."
Renting out your home. Cutting out liabilities is another creative way for new business owners to fund their startups. For Fay Johnson, founder and editor of deliberateLIFE magazine, that meant renting out her apartment. Johnson was able to do this by placing her San Francisco apartment on Airbnb and renting it out for anywhere between five nights and a month at a time. The decision has been successful for Johnson, who has used the money raised to fund the costs of the first few issues of her magazine. Though the move has allowed Johnson to finance her startup, it has not come without its share of headaches, including tight time restraints.
"As an entrepreneur, time is one of your most valuable resources," Johnson said. "When renting, I have to keep in mind that I need to clean and reclean the apartment, and since I work from home, I also have to find a place to work during those days."
Crowdfunding. Crowdfunding on websites like Kickstarter and Indiegogo can give a big boost to the financing aspirations of small businesses. These sites allow businesses to pool small investments from a number of investors instead of forcing companies to look for a single investment. Many sites allow companies to raise money in exchange for rewards or products. Others have an equity-based model in which businesses give up a bit of their share.
Before choosing a crowdfunding platform, be sure to read all the fine print and know what you're getting into. Certain sites require businesses to raise their full stated goal in order to keep any money raised on the platform. Other sites will allow companies to keep any money they raise. Additionally, sites can claim a percentage of any money raised on the site. Sites often also charge a payment-processing fee for money raised.
Grants. If your business focuses on a scientific or research-oriented field, grants from the government may be able to help fund your company. The SBA offers grants through the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. Grant recipients are required to meet federal research and development goals, and to have a high potential for commercialization.
Shinar said there are not many downsides to a truly no-strings-attached grant. However, you should carefully read the fine print because grants may require that you give up part of the IT or other intellectual property, Shinar noted. Grants also can be time-consuming, and depending on the sector, the ratio of time expenditure to the odds of payout may be too high. Nonetheless, if your company could be eligible, it is wise to review the options.
Precautions and next steps
While the plethora of lending options may make it easier than ever to get started, responsible business owners should ask themselves how much financial assistance they really need. Companies that receive more income than they truly need should be prudent in how it is used. Shinar urged such companies to make — and stick to — a disciplined budget.
"It's hard to go back later and try to exert fiscal discipline," Shinar said. "It's better to start from the beginning with good corporate governance."
Companies that have received a large cash infusion may benefit from bringing in an experienced partner or board member to help ensure accountability, Shinar added.
As an alternative, bootstrapping your company — building it with existing resources and earned revenue — offers companies a low-risk way to test out their product. If you and your partners are able to work toward creating a functional product in your spare time, you may be able to begin to sell that product with minimal or no cash.
"The advantage of bootstrapping is that you stay the boss," Shinar said. "More importantly, you get relatively quick validation from the market about whether you have a good business plan. Bootstrapping helps imbue a company with operational discipline."
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