6 Simple Ways To Fund Your Startup Without Giving Up Equity
Financing options for startup entrepreneurs that are ready to launch without giving up equity.
June 21, 2019 at 5:19 pm
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The thought of starting a new business can be very exciting. Following your dreams and starting a business your are passionate about is a huge milestone in life. That’s why it’s important to have all your ducks in a row before you take the leap into entrepreneurship. One bad decision could be the downfall of your new business. To minimize your chances of failure (and increase your chances of success), there are some important things that should be in place before you start. You should have a legally registered business, competent and trustworthy management team, a well researched business plan, marketing plan and at least 3 years of financial projections and most importantly-- capital.
Why do you need these things? Studies show that an incompetent management team, lack of planning and lack of capital are some of the top reasons why new businesses fail (and do it quickly). In this article, I focus on the lack of capital.
Lack of [adequate] capital can stop you dead in your tracks. No matter how great of a business idea you have, how experienced your management team is or how you’ve planned this awesome launch, if you don’t have the money to do it, it won’t happen. Funding a business (and keeping it funded) may seem like one of the hardest things you will have to do. However, it doesn’t have to be. The key is knowing what options are available, when you should use them and how you should them.
For startup entrepreneurs, there are a number of funding options that can be utilized to get a new business up and running. These types of funding are actually quite easy to simple to get and can be obtained in a short period of time (usually less than 30 days). The key to obtaining any of these financing options is to ensure you meet the requirements for approval. Below I describe what these financing options are and how to obtain them.
Your Personal Savings or 401(K) Savings
This is an easy one. I always suggest startup entrepreneurs fund their business with their personal savings because it’s your money. It’s perfectly fine to borrow money from a lender or raise capital from investors but bootstrapping a business for as long as possible is a good way to go. This is especially true if you don’t want to give up ownership in your company too early or take on debt too soon. You can also use your 401(k) savings to invest in your business without facing penalties from the IRS. Many people use their 401(k) to fund the purchase of a franchise or existing business.
No Income Verification Business Line of Credit
This is by far one of the most popular ways to fund a new business. Primarily because it’s fairly easy to obtain and can be used to pay for any business expense. Your business doesn’t need to have a proven track record, nor will you be required to pledge collateral. You do however need a good personal credit history to qualify. Even if you don’t have a good personal credit history, if you can find someone who believes in you and is willing to help you, they can use their good personal credit history to help you apply.
Real Estate Line of Credit
(Also known as Real Estate Investing Business Cards) This type of financing is similar to a no income verification business line of credit, the only difference is that it’s for entrepreneurs who are starting a business in the real estate industry. Whether you are flipping properties, selling them wholesale or managing them, you can fund your real estate projects with this type of credit line.
No PG Business Credit Cards
This type of financing is considered “vendor credit” or “store credit” and doesn’t require you to use your personal credit history to get approved. Depending on what industry you are operating in, this can be an excellent way to purchase the things you need to effectively operate your business. The only drawback is that these cards can only be used with the vendor or store that issued them to you. Despite that drawback, using vendor and store credit cards will help you build your business credit score with Dun & Bradstreet, Experian Business and Equifax Commercial. (For funding that can be used for any purpose, I suggest the no income verification business line of credit instead).
Equipment Leasing & Financing
This type of financing works well if you are starting a business that requires you to use equipment on a long-term basis. For example a cannabis grower would need lighting and extractor equipment to effectively cultivate cannabis. The cannabis grower would likely want to lease equipment for a specified time frame (rather than buying it outright) and equipment leasing gives them the option to that. At the end of the leasing term, lenders/lessors usually offer the option to buy the equipment at fair market value or return the equipment. It is essentially up to the business owner. Equipment leasing is usually a much cheaper option than purchasing equipment outright for startup businesses.
This type of financing is actually recommended by the U.S. Small Business Administration as the first type of financing a startup entrepreneur should apply for. Microloans are offered to startup entrepreneurs (and established businesses) that present a well-written, viable business plan. Microloans have lower interest rates than traditional and alternative business loans and longer pay back terms. For example, I was able to obtain a $30,000 microloan at 8% interest and a 3 year pay back term from a microlender. I pitched my business plan (they also reviewed the written version) and I was awarded the loan based primarily based on that.
The good thing about each type of financing I’ve discussed here is that in some cases, they can (and should be) obtained simultaneously. That means you will end up with more money than you would have if you only take advantage of one of these financing options (at a time). Also, just because you obtain them at the same time doesn’t mean you have to use all of the money at the same. For example, I obtained a microloan and no income verification business lines of credit at the same time to fund my business. I only used the microloan funding (as needed) and I keep the lines of credit for a rainy day. Having that extra working capital “stashed” away so I can use it when I need it does come in handy. Managing my business finances like this requires strict discipline but it helps me keep my business capitalized. (Generating consistent revenue from my clients also helps me keep the business capitalized but that’s a story for another article).
One thing I didn’t mention in my list is crowdfunding. While I know crowdfunding is all the rage, I didn’t list it because it costs money to launch a crowdfunding campaign. For example, a good crowdfunding video may cost up to $1,500 and good PR may cost up to $2,500 for a campaign. (These are just a few examples of the costs associated with running a good crowdfunding campaign). All successful crowdfunding campaigns require the implementation of good marketing which will cost you money upfront. Therefore, I usually recommend that a crowdfunding campaign be done a little later into the development of your new business (maybe several months after you obtain any of the other types of financing I mentioned). You will be able to use that funding to pay for the services needed to get more exposure for your crowdfunding campaign.