Even if you’re asking your mom for help, you need to determine how much money you need and how long that amount will last. Creating a robust business plan, while not required for all financing options, is always a good exercise for testing the viability of your idea.
When you need money to launch a new business or a startup, consider these eight business financing options.
Business Financing Money from Family & Friends
Friends and family are a logical, and popular, resource for new entrepreneurs. But tread carefully. Loan repayments can be a tremendous source of stress if terms aren’t laid out clearly. The Small Business Administration (SBA) has a list of six tips for borrowing from friends and family. Bottom line: do your homework before you make the startup financing pitch and make sure you document everything as you would with a more traditional investor or lender to avoid future conflict and hard feelings.
Use a Credit Card
Credit cards are an easy way to get money fast, but they usually come with higher interest rates, and debt accumulates quickly if you don’t pay your balance in full every month. If you have the cash and are looking to rack up bonus rewards, credit cards can be a great way to float a larger purchase for the month.
But there are risks. Depending on your business structure, you might be the personal guarantor on all debts, meaning that if you fall behind on payments, your personal credit rating suffers. Also, if your business is incorporated, your credit card issuer can still require that main shareholders guarantee the line of credit, putting your personal credit on the line again.
Get a Traditional Loan
If you want a loan from a bank or credit union, having a comprehensive business plan is a good place to start. Bank or credit union loans can be difficult for new businesses to obtain because they usually require several years of profit-and-loss statements. At Teachers Credit Union, no matter where you are in your company’s journey, we invite you to contact our Business Lending Team and see how we can help. Our seasoned specialists know how to assist businesses at all stages with just the right type of loan to help you reach your goals.
Another option is a loan backed by the SBA, a division of the federal government. The SBA doesn’t lend directly to small business, but instead serves as the guarantor and co-signer for loans you’d get from an SBA-approved lender, such as TCU. Regardless of your funding status, the SBA can serve as a great resource for education and mentoring at any stage of your business journey. Find a local SBA chapter in Northern Indiana or Michigan at this link or connect with a TCU lender to learn more.
View SBA's Financing Options for Small Businesses Training Video
Crowdfunding started as a platform to raise money for nonprofits and charity projects. But they quickly morphed into an option for business funding, especially after federal legislation was passed to encourage alternatives to traditional funding. Crowdfunding can be effective for small, community businesses to receive monetary support from the people they serve.
Setting up a crowdfunding account for your business requires a strong marketing campaign, because that’s how you pitch your idea and encourage investment. Take care to read the fine print when comparing platforms since not all crowdfunding systems are created equal in terms of fees, which can differ based on your industry.
Angel investors are usually affluent individuals who invest in startups in the earliest stages in exchange for an equity ownership (typically 20-25%). They are different from venture capitalists in that they provide seed funding – typically less than $1 million – whereas venture capitalists invest larger amounts in more established, growing companies.
To find an angel investor, search investor networks that may exist in your niche, industry or community. Angel investors are looking for strong returns on investment, so showing them how their investment can make a difference will strengthen your position.
Microloans (loans ranging from $500 to $35,000) are typically short-term loans with a low interest rate available specifically to self-employed people, new startups with low capital, or small businesses with a small staff. They can be easier to qualify for and can help bridge the gap between the money you have and the money you need. The Business Lending Team at TCU can help you to determine if this is an option for you.
The best place to start researching options is the SBA website. Then, check out resources through your local Small Business Development Center, Women's Business Center, Veteran's Business Center and the mentoring experts at SCORE as narrow your focus to specific needs.
All of this can feel overwhelming! But don’t let it get in the way of your dreams. Feel free to stop by one of our locations or reach out directly to our business lending specialists. We would be happy to answer any questions you may have and see how we can achieve your business goals.
Disclaimer: This article is for educational purposes only and doesn’t constitute tax, legal or accounting advice. Please consult with an attorney or tax professional for guidance.