You might think that managing a company and keeping it profitable is one of the most difficult tasks for an entrepreneur, but you may just be mistaken. Growing a business beyond the launch phase, in the first place, can be extremely challenging. In fact, 22.5% of new businesses fail within the first year of their operation.
Even before considering how you’ll get through the first year, you need to gather the funds to start your small business. Startups cost a lot of money. Between owning a website, coming up with inventory, advertising, payroll and rent, you’re likely to cough up several thousands of dollars – and that’s if you’re considered a microbusiness. Depending on the size of your business, you may find that you don’t have enough cash on hand to get your business off the ground and start seeing growth. That’s when it becomes critical to learn about other funding alternatives.
For the sake of this piece, forget about making money. We’re talking about generating money before the launch so your company has what it takes to get off the ground and into the green. Here are some must-know alternatives you should explore when it comes to financing your business so that you can make the most of your investment.
Believe it or not, 32% of entrepreneurs use hard-earned cash to kick off their startup. This process, often referred to as bootstrapping, can be extremely beneficial for those starting a business with higher levels of uncertainty being that you’re not committing to another loan. Whether it be your own life savings, receiving help from friends and family or tapping into your retirement fund, it may be possible for you to come up with the cash on your own and avoid any additional debt. Some entrepreneurs use a second stream of income, otherwise known as a side hustle, to support the business, while others may revert to selling some of their assets to acquire some fast cash.
However, if you’re in good financial health in terms of your debt-to-income ratio (DTI) and credit health, you may decide you don’t necessarily have to dwindle your savings account and an additional loan is a payment you can handle. Read along to learn about some of the loans you can take advantage of in order to kickstart your business.
Home Equity Loans
So if 32% of entrepreneurs use cash to fund the launch of their business, what does that mean for the majority? Well, understandably, many will have to look elsewhere to cover their startup costs. And believe it or not, you can take advantage of your home’s equity to do so. If you own a home and have paid down a sufficient portion of your mortgage, maintained good credit health and have a proven appropriate payment history, you could qualify for a home equity loan. But what is a home equity loan?
A HEL allows you to borrow against the equity in your home to get a lump sum of cash that you can use however and whenever you want. You pay back the loan in the form of monthly installments plus interest, similar to your mortgage payment, essentially making this loan a second mortgage. While the interest rate for these loans are fixed and typically have lower rates than personal loans, your home does become collateral. That said, if your profits decrease drastically, you may fall back on payments and ultimately lose your home if you default on the loan.
Home equity lines of credit (HELOCs) are similar to home equity loans in that you borrow against your home’s equity. However, these operate similarly to a credit card. For example, if you’re granted a loan for $40,000 but only spend $20,000 of that money, you only need to pay back the $20,000 that you spent rather than the total that you were approved for. The benefit to this method is that you can utilize this credit over a longer period of time to manage unanticipated business expenses, like repairs to equipment or even skyrocketing growth.
Raising venture capital
One way to gather funding without dipping into your own wealth or assets is to raise capital from outside investors. After a daunting process of seeking out investors, sharing your business plan, a detailed inspection by a firm or individual of all aspects of your company and the creation of an agreement between the investor and the business, the firm will decide whether or not they believe in the profit potential of the company. It’s important to know that, upon the agreement, the investor will gain a fraction of ownership in the company and in turn a chunk of the profits made by your small business, which is definitely worth considering before taking this route. However, it can be extremely successful in acquiring cash that you couldn’t come close to alone.
Crowdfunding is an option similar to raising venture capital in that you’ll receive money upon request from outside investors. However, in this case, the investors won’t receive a cut of your profits. In return, they’d expect your tangible products or services in return for their financial contribution to your business. Plus, this arrangement typically doesn’t call for you paying the money back should your operation go under, so it’s low risk. Crowdfunding campaigns have proven fruitful. In fact, last year, over 6.4 million campaigns ran last year alone and $17.2 billion was raised on average each year, which was 33.7% greater than the year before.
Small Business Loans
The U.S. Small Business Administration (SBA) works with lenders to make loans more accessible to small businesses by lining out guidelines for their partners to reduce the risk of lending. If a lender is SBA-approved, you can inquire about a loan to support your company and an expert will help you determine what kind of small business loan is right for you and in the right amount.
To qualify, you’ll need to come prepared with your business plan and other documentation that gives lenders a clear picture of your business’ potential revenue, its strengths and its weaknesses. Remember to first verify that the lender you’re working with is SBA-approved before exploring this option.
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When it comes to starting your business, the financing options are seemingly endless. From loans to grants to good old-fashioned cash, a strong will and entrepreneurial drive will help you succeed in whichever route you take.