One of the primary sources for startup funding are friends and family; however, this form of funding may be burdensome as it requires giving up some equity of your company.
Self-financing your business using personal savings or your 401(k) is another alternative that allows you to maintain control of the company and avoid incurring interest charges.
Friends and Family
Friends and family can be an excellent source of startup funding. Their arrangements tend to be more flexible than business loans and angel investments due to investing in the founder’s passion and trust rather than in the company itself.
However, one major disadvantage to beware of at this stage of business development is attempting to accurately portray a company’s trajectory and assign an accurate valuation. Furthermore, those familiar with its founders often feel free to criticize management decisions and business decisions made by them as well.
Draft a contract outlining all of the details regarding repayment plans, interest rates and equity sharing arrangements to make sure both parties understand all terms clearly. This helps avoid future conflict.
Crowdfunding
Entrepreneurs were once faced with many hurdles when trying to bring their idea for a business or product idea to market. They could apply for grants or loans or turn to friends and family for money; some even relied on savings accounts as sources.
Crowdfunding allows businesses to seek small investments from a broad array of potential investors through crowdfunding platforms that enable contributors to make cash or tangible items available in return for their investment. There are different forms of crowdfunding such as donation-based and debt-based platforms.
Crowdfunding campaigns can serve as both marketing and brand advocacy strategies, making the campaign particularly helpful for start-ups that have yet to reach critical mass in terms of customers.
SBA Loans
The Small Business Administration offers several loan programs designed to assist your startup business. As these loans are government-backed, lenders assume less risk and are therefore more likely to approve you than with traditional business loans.
To qualify for an SBA loan, you must present financial projections that show how your business will make money and cover debt payments. These should include both startup costs and ongoing expenses.
Lenders will also evaluate your credit history and score. Startup businesses, due to lack of established financial records, may find it challenging to qualify for a Small Business Administration loan; however, certain SBA programs provide flexible requirements and faster application turnaround times; such as the Express Loan which can be used for franchise financing, commercial real estate investments, working capital purchases or equipment purchases.
Business Credit Cards
Credit cards provide an easy and flexible way for businesses to cover startup costs without incurring long-term debt. Startup costs can often be charged to the card and paid back during its introductory 0% APR period, saving on interest charges while keeping both personal and business finances separate for tax purposes.
Furthermore, business credit cards help build your company’s credit profile and can make qualifying for loans much simpler in the future. But it is crucial that you select an appropriate card and manage its credit limit properly.
If you are launching a startup, look for cards with minimal or no business history requirements and personal guarantees, along with integrated spend management software to quickly close your books faster and extend runway.
Family Loans
Family loans can be an efficient and fast way to raise startup funds quickly; however, they do come with inherent risks for both parties involved. If a lender does not charge interest and instead adds it onto your loan amount without charging you interest yourself, the IRS could assess taxes on imputed interest charges based on IRS regulations. Putting the loan agreement in writing and tracking repayments will help avoid issues and keep everyone happy.
When looking for funding your startup business, a platform that matches lenders and borrowers may offer faster application processes and higher approval rates than traditional bank business loans. Furthermore, you could possibly obtain more flexible terms including lower interest rates and flexible repayment schedules – an especially helpful solution if unexpected expenses or growth happen quickly.
