Starting a business takes more than just a great idea and knowledge. It also takes money — lots and lots of money. In the past the best place to get the funds necessary to start a new business venture was the local bank to secure a small business loan. Unfortunately, those loans have virtually dried up, unless you already have some money to show your commitment to the project. According to the Small Business Administration (SBA), banks usually require at least $20,000 in secured capital before considering any type of small business loan. Larger investments may require even heftier private funding. This can seem virtually impossible for a new start-up. Still, there are ways to get the money you need to get the doors open, if you are willing to take a few financial risks.
Home Equity to the Rescue
Not for the weak, or those who don’t believe in their venture 100%, using the equity in your home may be an option to getting the start-up funds you need. Once you have opened your doors, and begin to show a profit you can then apply for a small business loan to pay off your house debt.
A good way to get a large amount of money quickly, home equity loans are fairly easy to acquire if you have equity in your home and good credit. Another benefit of using your home’s equity to secure funds is you can take this type of loan out for longer periods of time (usually 20-30 years). This will keep your payments low; something a new business owner will appreciate.
Although home equity loans give you one lump sum of cash to use for your business, an equity line of credit can help to fill in the gaps without paying interest. Let’s say you have secured some funding for your start-up but fear you will not have enough, a line of credit makes the money available if you need it. You take out just what you need when necessary and pay interest on that amount only. Of course, the interest rates can be higher on this type of loan, but many people prefer them.
Although these types of loans do make money available for your business, they do offer some big risks. Remember, you are using your home as collateral and if you get in over your head or your business fails you are going to be responsible for paying back the loan or risk losing your home.
This can be too much of a risk for some borrowers. Still, the option can be a good one if start-up funds are limited.
A fast and easy way to get quick cash, credit cards can help to pay unexpected bills or even give you the cash to get started on a new venture. The problem with this funding source is that credit cards usually come with very high interest rates, making paying off the balances difficult. Plus, most banks will deny a business loan when highs credit card balances are outstanding.
Friends and Family
One of the best ways to get the start-up funds needed for a new business venture is to ask friends and family to invest. Not necessarily a loan or a gift, you can draw up a partnership agreement, offering investors a certain percentage of the profits for a specified period of time or until the money is paid back. Some people may opt in only if they can remain a partner after the initial investment is paid back. The terms are up to you and your investor.
When you need a large amount of money to get your business off the ground, you may need an investor capitalist, a person or organization that looks to fund promising new start-ups for a future cut in the profits. If you have ever watched the popular TV show Shark Tanks you will see this process first hand. A business owner takes their idea to the investor capitalist and asks for a certain amount of money (and maybe a cut in the profits) in exchange for their money and support. In the case of Shark Tank, the entrepreneurs are usually trying to secure more than just money – they want an investors know-how. But many simply work with funding.
To learn more about this option, contact your local Small Business Administrative or Service Corps of Retired Executives (SCORE), office in your area. Both offer free services and are a wealth of information regarding all aspects of starting and running a small to mid-sized business.
Private Foundation and Government Grants
Many entrepreneurs mistakenly believe that there are billions of dollars of private foundation and grant monies being circulated right now to help the small business owner. While there may be a lot of money in the system right now, most of it is designated for non-profit organizations; and even amongst them competition for these funds are high.
Few privately owned businesses qualify for private foundation or government grant monies unless the business falls under a small select group of minorities and revitalization projects. There are some funds available for certain industries too, but they too are small and very individualized. It takes a real expert to be able to find the funds and then procure them. Professionals specializing in these types of grants usually charge $50-$200 an hour for their services; which by the way must be paid with absolutely no promise of success. This usually leaves the new start-up unable to even try for government or private grant monies.
You need money to start you new business; but you will need knowledge and tenacity to find (and get) it. The best way to begin is to write up a detailed business plan and budget and then look at ways to fund the project yourself. Once you can begin to show a profit, there will be more opportunities for funding. At the beginning, however, getting the money you need will mostly depend on you.