Got an Idea for a Business? Great! Here’s How to Finance ItBusiness financing can be a complex, confusing world, but there are ways to make it easier and more effective.
Starting a business isn’t cheap. Navigating the world of financing options can be exhausting, but with a little guidance it can be less overwhelming. There are great options for funding your business that go beyond traditional bank loans (though those work, too).
From the massive success of crowdfunding sites to nonprofit microlenders, there are a lot of new options available today that could have you up and running in no time.
Kickstarter is the go-to for businesses looking to use crowdfunding as a source of capital. There are other sites, like IndieGoGo and GoFundMe, but they have less cachet for legitimate business use. You won’t get the money you raise from Kickstarter unless you meet your goal. They’ll take 5% of the total funding, and the payments processor takes 35% of each payment. Taking this into account when deciding how much funding you want to go for will help you offset these losses.
The upside to using Kickstarter is that it gets people engaged in your business before you launch. They’ll be excited to share on social media that they’ve contributed, which will aid your early marketing efforts. Creating the video, deciding on backer rewards, and writing out goals in plain language will also help you better conceive of your business outside of the jargon of a business plan. Successful Kickstarters often garner local press as well, which will be a great boon to a just-launched venture. In 2013, I launched my own Kickstarter to finance growth to my small bakery. It led to a local news TV spot and a paper calling me the “non-dairy queen.”
Small Business Association loans
Government-backed loans are provided by the Small Business Association (SBA), which can also provide a lot of guidance for starting up a business. They offer microloans and general small business loans that can help with launch costs. The SBA isn’t the lender, but it sets the terms for the loan, which is provided by an intermediary. Their guarantee ensures that the loan will be repaid, thus decreasing risk to the lender. They’re set up for longer-term financing, with up to 25-year maturities for real estate, 10 years for equipment and seven years for working capital.
Interest rates vary, but for microloans – up to $50,000, with an average of $13,000 – rates are generally 8 to 13 percent. You can’t use a microloan for real estate or to pay off existing debt, but separate real estate and equipment loans are available. The SBA also helps with general 7(a) small business loans, where interest rates depend on the amount of funding, but are subject to a maximum, which will keep rates from being exorbitant.
There are nonprofits that exist to help out new businesses with loans as low as $200 and up to the hundreds of thousands. These are especially available to women, veterans, Native Americans and other minority business owners, as well as those who are seeking to minimize their carbon footprint.
Accion is the most well-known of these, having operated in the U.S. since 1961. A newer nonprofit in this arena is Kiva Zip, which offers 0 percent interest loans by having business owners leverage their own networks: Friends, family and customers chip in, which will determine credit-worthiness; then Kiva Zip opens up funding to its own network of lenders to the business. It’s similar to crowdfunding in that it revs up a business’s base and brings in new people as supporters. Other nonprofits, such as Grameen America for women and the Business Center for New Americans for immigrants, seek to help specific populations get their businesses up and running.
If you are unemployed and have money saved in a 401(k), it can be rolled over into a corporation without being a major tax burden. You have to establish a C corporation, then put a new 401(k) plan in place in it; next, you’d roll over the assets of the existing 401(k) into the new one in the corporation and the new business you’ve formed can be treated as an asset of the 401(k). The money is in there now to be used for any and all business costs. It’s a risky way to go because you’re putting up your retirement savings, but any losses would be an investment loss – you’re not leveraging more than the money.