7 Ways To Finance Your New Business Expenses | Financing can be one of the most challenging aspects of starting a new business. However, there are a variety of options available.
- Credit Cards
The advantage of using credit cards, such as the American Express credit card, to fund a new business is that they provide quick access to funds and some cards come with limits of up to $50,000 or more. You don’t need to apply for a loan or submit a business plan to use your line of credit. Additionally, as long as you make your minimum payments, you can control how long you carry the debt. The downside is that credit cards usually have higher interest rates than other types of credit and if your business fails or takes some time to become profitable, you may have a difficult time paying off your debt.
- Personal Assets
More than two-thirds of new business owners fund at least part of their new business expenses through personal assets, such as savings, retirement accounts, or property sales. A home equity loan may be an option for some people; however, using this asset can put your home at risk if you are unable to make your payments. If you have a 401(k), IRA or life insurance policy, you may be able to borrow money from these assets.
- Friends and Family
Borrowing money from friends and family can be a way to avoid high-interest rates or get financing if you have trouble qualifying for a loan. If you go this route, make sure you borrow the money with the intent to repay, rather than offering an equity stake in your business. Otherwise, you could end up having to include your friends and family in every business decision you make. Put the terms of the loan in writing so that there are no disputes later and make sure you pay it back, as agreed, to avoid ruining relationships.
- Bank Loans
Bank loans are one of the lowest risk ways to get financing, but can also be the most difficult. Many banks do not want to take a chance on a new business. You must convince the lender that your business is likely to succeed by presenting a compelling business plan. Most banks require collateral that can be seized if you fail to make your payments.
- Small Business Administration Financing
The U.S. SBA provides a loan guarantee program for new businesses. If you get a loan through this program, the SBA will pay back a portion of the loan if you default. This program can help you qualify for a commercial loan that you otherwise may not be able to get because of poor credit or lack of collateral.
Small Business Investment Centers are another SBA program that assists small businesses with financing. These are privately held investment firms that follow SBA guidelines in exchange for SBA loan guarantees.
Some new businesses can obtain financing by convincing potential customers to invest in the business before the business is started. This works by designing and demonstrating an in-demand product that customers are willing to invest in so that they can purchase this product when your business launches.
- Angel Investors
Angel investors are business people who invest in new businesses with high growth potential. Funds from an angel investor do not need to be repaid; however, the investor receives an equity share in your business. This means that angel investors have partial control of your business. Typically, an angel investor will want between a 10% and 50% stake in a new business. Before accepting money from an angel investor, consider whether you want to give up control of your business and a share of your future profits to obtain financing.
Many new business owners must use a combination of different financing methods to cover all of the expenses that come with starting a business. The best options for you depend on your resources and fundraising goals.