5 Most Popular Options Used to Finance a Startup

5 Most Popular Options Used to Finance a Startup

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Every new business owner carries a heavy load when it comes to finding seed money to launch and grow his or her dream business. Even though alternative sources like equity-based crowdfunding are sprouting up, most entrepreneurs are still turning to traditional sources to finance their companies.

According to SmallBizTrends.com, here are the five most common ways entrepreneurs are raising much needed capital to jumpstart their businesses.

1. Credit Cards: According to a 2012 National Federation of Independent Business (NFIB) study, 79% of small business owners used credit cards to start or grow their business. Another study showed that about 4 out of 5 small business owners are still using credit cards. Google’s founders Larry Page and Sergey Brin used credit card financing in the early stages of the search engine tech giant. Most other successful business owners have used credit cards as well. It’s like anything else in that, you can use credit cards the right way or the wrong way. The key is to have a plan for how to use the credit and manage positive cashflow. Check out resources such as Lendio and NCH Capital that help a lot of business owners learn how to use business credit cards to grow their businesses.

2. Microloans: These small loans, anywhere from $500 to $50,000, are typically granted to business owners who do not qualify for traditional bank financing. According to the Microfinance Information Exchange, MicroBanking Bulletin Issue #19, nearly 74 million entrepreneurs across the world have microloans that are equal to a combined total of $38 billion U.S. dollars. Statistics vary but most microlenders report that between 95 — 99% of their loans are repaid, suggesting that small businesses have experienced a significant level of success using micro financing. Microlender Kiva.org had over a 99% repayment rate in the month of November alone. Moreover, according to a survey conducted by microlender Accion U.S. Network, 42% of survey respondents said their business income increased (between 2010 & 2011) as a result of a microloan.

3. Personal Savings: This is the #1 small business financing option for most people who find that they don’t qualify for credit cards, microloans, or any other type of “traditional bank financing.” This is a great way to get started. If you don’t quality for things like business credit cards or traditional bank financing, then you may want to take the appropriate steps to correct any credit issues that may be part of the problem. If you’re like millions of other business owners with less-than-perfect credit, then do something about it. Resources like Creditera are invaluable as it is currently the only credit monitoring platform that allows business owners to monitor both business and personal credit in one place.

4. Family and Friends: For some people, that list of possible investors from their friends and family is a long one. For others it’s a short list. Often times it is difficult to obtain financing from family and friends because they may not fully understand the business or believe it will succeed. You will really need to do what it takes to convince them the business will be lucrative and successful to get them to invest. Whatever you do, be sure to treat your friends and family no different than you would a savvy angel investor. They deserve updates, communication and to be one of the first phone calls when there is a problem. You should treat them as the partner you allowed them to become when you accepted their check.

5. Retirement Accounts: This small business financing option is highly popular for entrepreneurs who want to purchase a franchise. In order to use your retirement account to fund your business, you would use the Rollover for Business Startup (ROBS) Strategy. This strategy is slightly complicated so you’ll want to consult with an expert such as Benetrends or Tenet Financial Group. It consists of forming a C Corporation and rolling your current retirement plan over to the new corporation’s retirement plan. It’s a relatively complex strategy. So don’t try it on your own and do your due-diligence. In the event that your business fails, you will likely lose your nest egg or whatever portion of it you “rolled over.”