If you’re thinking of starting a business, establishing a solid base to finance your startup is one of the first steps you’ll take as an entrepreneur.
Whether you’re new to business ownership or you’ve run companies in the past, you need to know how much money you will need and where it will come from before you can even think about setting up e.g. a shop.
In order to choose the best source of funding for your enterprise, you must understand the different options available to small businesses and how each one could affect your financial future.
To help you weigh up your options, here are five ways you can finance your startup.
1. Use a Credit Card
Financing your business with a credit card might sound like risky business, but if the correct cards are used, this option could help build your business profile and shore up your cash flow if exercised responsibly.
Just try not to resort to using your personal credit card to finance your business. If your venture isn’t successful, you need to know that you have stable personal finances to fall back on.
Get more advice on establishing and building business credit here.
2. Apply for a Bank Loan
Most banks have allocated funds set aside for small business loans. So even though the lending standards are far stricter than they used to be, if you can prove that you have a solid business plan and a good track record, there’s no reason why you shouldn’t be eligible.
Take time to research how to fill out a business loan application before you apply. Each failed attempt may affect your credit profile.
3. Try Crowdfunding
Just be aware that you will usually have to pay a fee of around 5 percent if you successfully raise your requested funds. And up to 9 percent if you don’t meet your financial goal.
4. Apply for an SBA Loan
In the US, if the bank has turned you down, then you can apply for a loan from the U.S. Small Business Administration (SBA).
SBA backed loans are open to any small business, but there are some requirements you’ll need to meet. For instance, you’ll need to have been denied credit already, and you need to meet the government’s definition of a small business.
You may also need to meet other criteria depending on the nature of your loan.
The SBA can also use your FICO SBSS credit score in order to determine credit risk. This score is unique in that it’s a combination of the owners personal credit and the company’s business credit scores.
5. Appeal to a Private Investor
Appealing to a private investor is the most common way to secure finance for a business startup, but you need to be wary of the risks involved.
Whether you appeal to an angel investor or ask friends and family to support you, you need to keep the lending process as professional and clear-cut as possible.
Make sure you formalise your business plan before you broach the subject of a loan. You won’t attract a private lender without showing that your business concept has legs and that they will see a return on their investment.
Similarly, approaching a family member without a formal business plan and documentation in place will put them in an awkward position, and this could create tension in your relationships.
In the majority of these cases, business (and possibly personal) credit will be reviewed. It’s important that you stay on top of every credit profile to prevent your business credit from impacting future success and cash flow.