Here are nine best options for business startups.
Rollover for Business Startups (Retirement Money)
- Use retirement funds without tax and penalties
- No debt
- Retirement can grow if business is successful
- Failure in the business means losing savings
ROBS, or Rollover as Business Startups, let you invest into your business using funds from your retirement. Doing so allows you to circumvent withdrawal penalties or income taxes. This means you are buying stock from your funds (401k/IRA) and hold that stock in your retirement.
ROBS only applies to your company if labeled as a “C” corporation. Your 401k receives a portion of funds from its ownership percentage if the company is successful.
- Quick funding.
- Limited to $35,000.
- Require good credit scores.
- Higher interest rates for those with lower credit scores.
Personal loans have historically been used to pay off credit cards or debt. As of recently, they can be used for business purposes. If taking out a personal loan, you are solely responsible for payments. Your credit ratings will suffer if neglected.
Interest rates fluctuate at a moment’s notice with personal loans. Those companies that deem a borrower “risky” can have an interest rate higher than others.
- Cost effective
- Credit line limits spending
- Debt accrues quickly
- Require very good credit rating to qualify
Business credit cards have recently begun gaining traction. They maintain a cost effective way to fund businesses. On average, interest rates are around 16%. Most credit cards also have benefits, such as cashback and rewards programs. If used responsibly, you can further build your credit score as it builds business credit.
Though the benefits are apparent, there exist downsides to credit cards. Not only do they have high-interest rates, credit cards are an unstable source of funding. Credit companies can lower limits on a whim if they feel it necessary. Lastly, business credit does not have the same kind of legal protection that consumer credit cards can have.
Family and Friend Loan
- Failure to repay can make for rough situations.
Friends and family are another sources of possible funding. If doing so, make sure to get everything in writing to prevent misunderstandings between your potential investors. Two ways of getting a loan from friends and family are to either sell them a share of your business or take their money as a loan. Generally speaking, taking money from friends and family is easier than selling them a share of the business because of future complications.
Home Equity Loan or Line of Credit
- Low-interest rates.
- The risk of losing the home.
If you are a homeowner with equity totaling 15% or more, it is possible to receive a loan using your equity. The amount available for use depends on the value of your home and mortgage. HEL (home equity loan) is similar to having a second mortgage, while HELOC (home equity line of credit) acts like credit using your home as collateral. The benefit of this is you can receive funding with very low interest compared to credit cards or personal loans.
Venture Capitalists/Angel Investors
- No debt
- No interest rates
- No maximum
- Investors will want some form of control of the business
- Investors seek large rates of return on their investment
Angel investors are a great way to fund startups. Most angel investors are wealthy individuals with some flexibility regarding contributions. Compared to venture capitalists, angel investors do not look for a great return on their investment. Instead, they seek control over business decisions.
Venture capital comes from a company or firm. Venture capitalists look for a very high rate of return on their investment. Generally speaking, this amount can be around ten to fifteen times the initial investment within a five year period. This can be hard for newer businesses since it is difficult to predict future returns.
Both options allow you to raise money without accruing debt.
- No debt
- Possibility of gaining a large amount of support
- All-or-nothing funding model may lead to a lot of work without reward
Similar to funding through friends and family, the general idea of crowdfunding is to raise small amounts of money from a large number of people. Crowdfunding websites such as Kickstarter and GoFundMe allow companies big and small to engage their crowd for funding.
If you would like to fund your business through crowdfunding, make sure your business campaign is strong. You can also offer rewards and incentives to supporters in exchange for their investment. This is popular among many startups, especially game companies. You may also offer shares of your business in exchange for investments.
Microloan from Nonprofit
- Borrow up to $50,000
- Reasonable interest rates
- Long application process (3-4 weeks)
Nonprofit lenders are an option to borrowers who have low credit. Accion, a nationwide lender, provides up to a $30,000 loan for a startup. Business owners can qualify for a loan through Accion if the business has sufficient revenue to make loan payments.
If you choose to go this route, be prepared to have a cosigner or provide evidence of a source of income apart from the business.
- Low-interest rates
- Hard to qualify for
- Two to three-month application process
SBA is known to target established businesses. They do, however, have two programs dedicated to underserved businesses, including startups. These programs are known as the Community Advantage Program and the Microloan Program.
The lender is not a bank in regards to both programs; instead, the lender is an intermediary such as a CDC or non-profit organization. These loans ar e available to self-financed startups and those of which have owners experienced in the industry as well as management. The Community Advantage Program permits startups up to $250,000, while the Microloan program allows a smaller amount – up to $50,000. SBA loans best quality is the low rate of interest.