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Financing is one of the most challenging obstacles an entrepreneur has to overcome when starting a business. Most startups require at least a small amount of seed money to get off the ground, and you may not necessarily have those funds ready to go when you want to launch. But a lack of cash shouldn't mean you have to put your entrepreneurial dreams on hold. Whether you want to go the traditional route or try something really creative, here are 15 ways to finance your small business.
Small Business Administration loan
The Small Business Administration (SBA) offers two types of loans that can help entrepreneurs get the capital they need to start their business: the 7(a) guarantee small business loan and the 504 fixed-asset small business finance program. The 7(a) guarantee loans are more common for small businesses. Prospective borrowers can apply for these loans at banks that participate in the SBA loan process. But this may not be the right choice for you if you don't have a proven track record.
"Both programs look for businesses not in the startup phase," said Chuck Evans, co-founder of Prudent Lenders LLC. "They look for businesses two years into the business cycle that are generating cash flow."[How to Apply For a Small Business Loan]
Traditional SBA loans typically take 60 to 90 days for approval and are distributed in amounts of $150,000 or more. Some programs, such as the new SmartBiz loan program by Better Finance Inc. and Golden Pacific Bank, offer approval for loans of $5,000 to $150,000 in just one week.
"Because bank funding typically takes so long or is unavailable for [smaller amounts], most small business owners turn to alternative, more expensive lending sources — like merchant cash advances or credit cards — to fill the gap," said Mark Quinn, San Francisco SBA district director. "[Programs like] SmartBiz offer affordable monthly payments and [fill] a significant void in the marketplace, offering an enormous opportunity to better serve small business owners with easy online access to a low-interest rate SBA loan."
No matter which type of loan you choose to pursue, you should seek a lender with extensive SBA loan experience, Evans recommended.
Selling your products is an often-overlooked and highly effective way to raise the money needed for financing your business. Entrepreneur Priska Diaz was able to raise $50,000 for her company Bittylab with a presale of her Bare air-free baby bottles. Her presale efforts allowed her to drive website traffic, get additional social media followers, and offer discounts to customers.
The money Diaz was able to raise helped her pay for inventory, and also helped to open some doors in retail and learn about her website's visitors. Though Diaz was able to benefit greatly from this means of financing, there were still some difficulties to overcome.
"The biggest challenge was in coordinating the inventory delivery times from our supplier so that we could start fulfilling orders," Diaz said. "Another challenge was forecasting the number of units we were going to presell, resulting in a shortage. We've now passed the presale stage and sold more than originally anticipated, resulting in back orders."
Friends and family
If you have a friend or relative with some spare cash, you have another potential way to finance your business. Borrowing from friends and family presents an interesting alternative to traditional forms of financing, and can have some unique advantages, including low- or no-interest payments and avoiding the hassles of bank contracts.
Debra Doran, managing partner of the Seattle branch of financial consulting firm CTC Consulting | Harris myCFO, recommended open, frequent communication with potential friend and family lenders to avoid damaging relationships with them.
"Having a well-thought-out game plan will increase the odds of family members and friends agreeing to be your financial partners," Doran told Business News Daily. "Business success is not assured, but by professionally approaching your family and friends to support your efforts, and communicating frequently on the progress of the business, the chances of maintaining good relationships are significantly higher."
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New business owners can try "double-dipping" as a means of funding their startup. Entrepreneur Alex Genadinik used his revenue from tours he organized on ComeHike.com to launch Problemio.com, which builds mobile apps for planning and starting a business. After receiving donations for some of the free hikes he led, Genadinik began to charge for events, where he marketed his new site to hikers.
"I tried everything else before that, including monetizing with ads and becoming an affiliate reseller for outdoor gear, but it didn't quite work," Genadinik said. "This allowed me to work on my project without the distraction of looking for investors."
Home equity loan
For homeowners who have equity — the home's value minus what you owe — a home equity loan is a great option for financing a small business. These loans generally offer interest rates that are both flexible and lower than traditional commercial rates.
"Home equity loans are very cheap, rate-wise," said Al Engel, executive vice president of consumer lending at Valley National Bank. "It is a very-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."
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."
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 drawbacks to consider before using plastic to fund your startup.
"The downside to credit-card financing is that it doesn't go away," 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. It can be really devastating to a business over a period of time to have to carry that kind of debt."
Small business owners often rely on credit cards to cover business costs, but savvy business owners can use those cards for more than just buying products. Ben Bakhshi was able to transfer credit-card balances as a way to fund the $25,000 in startup costs for Coordinato.com, which creates appointment-reminder software for small businesses.
Bakhshi said the credit-card company transferred funds onto another one of his credit cards, giving him a positive balance. Now, he's required to make minimum payments to the credit-card company, and plans to pay off the balance at the end of the year with income generated from the business.
"The money is being used for design work, as well as marketing and advertising," Bakhshi said. "This all provided much-needed cash flow for my startup, and at a very good price."
Those looking to finance their business can always look to an angel — angel investor, that is. Angel investors have helped to start up several 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 dollars," said Mark DiSalvo, CEO of private equity fund provider Sema4. "You are likely to get an investor who has strategic experience, so they can provide tactical benefit to the company they are investing in. That could mean that they have customers and/or partnership opportunities for these businesses."
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.
"The benefit of venture-capital investors to a startup is that they can help them get the money and provide them with professional management expertise," said Brian Haughey, assistant professor of finance and director of the investment center at Marist College. "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
Other times, 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."
Business owners with a Midas touch in real estate can also put that skill to good use in financing business ventures. Shelli Trung, founder of online real estate magazine Investors Beat, has been able to build her business thanks to investments she has made over the past seven years.
"I am currently financing my business with the cash flow from my real estate investments," Trung said. "Having had some success with property investing over the past years, I have made enough to fund the real estate investing online magazine in its current startup phase."
In 2007, software developers began working on a then-unknown personal assistant application. The application — Siri — was bought by Apple three years later, in 2010. One year later, with the release of the iPhone 4S, Siri has become one of the most well-known and intriguing features of the iPhone. Apple's investment serves as an example of what a strategic investment can provide an upstart company.
"Strategic investing is more for a large company that identifies promising technologies," Haughey said. "For whatever reason, that company may not want to build up the research-and-development department in-house to produce that product, so they buy a percentage of the company. It is a cheap investment, but the company could turn out to be the next Google or Facebook for them."
However, those using strategic investing must also think about the restrictions the investing companies may place on them. For instance, investors may cancel the business relationship at any time.
Renting out your home or apartment
Cutting out liabilities is another creative way for new business owners to fund their startups. For Fay Johnson, founder and editor of deliberateLIFE, 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."
Sometimes, there really is wisdom in crowds, especially if you are looking to start a new business. Crowdfunding on websites like Kickstarter, Indiegogo and others that are geared more toward businesses 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. The Jumpstart Our Business Startups (JOBS) Act has been instrumental in popularizing this form of financing in recent years.
Crowdfunding has many advantages, perhaps the biggest of which is that businesses are able to raise money without giving up an equity stake in their business. Many sites allow companies to raise money in exchange for rewards or products. Other sites have an equity-based model in which businesses do 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.
Additional reporting by Nicole Fallon, Business News Daily Staff Writer.
Originally published on Business News Daily on Nov. 30, 2011. Updated March 26, 2014.