Business as Usual
When I realized I wanted to open a new business, a million questions crossed my mind. How will I attract customers? What kind of legal protection do I need? What state/federal paperwork is required for my type of business? Most importantly at the time, the question of ‘where will I get the funding for all the ideas I have’ topped my list! I decided I would look at my options and come up with my own list of pros and cons for each approach.
Home Equity Financing
This is always a very tempting option. Having purchased my home a few years ago at a great deal, I had a good amount of equity available. While I was confident I could take out the funds needed to invest in a new business, I wanted to be sure anything I borrowed could be paid off if the business goes bust. This option does come with a good amount of risk and should be heavily weighed against other available options. If you have kids that are headed to college soon, you may want to pass on this for business funding and instead use your equity for tuition.
Small Business Administration (SBA) Financing
SBA loans are difficult to qualify for. There are business plans, resumes, tax returns, and a thorough underwriting process. The SBA does not actually provide the actual funding. Typically, lenders (banks or community development corporations) provide you with the funding. The SBA guarantees the loan in the event of a default. This is a benefit as it minimizes risk in the eyes of whichever lender you choose to go with.
Personal Credit Financing
Using personal credit can be a very risk thing to do. For one, you are exposing yourself in the event of a default as you are personally guaranteeing your debt. Fundera has a great post regarding the pros and cons of using personal credit to fund your business. If you were not able to repay your debt, creditors can seek repayment via your personal assets (i.e. your home, car, checking/saving accounts, etc.). Your credit score would also reap the benefits (if you pay your debt) or consequences (if you default). See how timing plays a key role in building your personal credit.
Business Credit Financing
In most circumstances, when attempting to establish business credit, you will likely have to personally guarantee your first round of credit. Building business credit is a process that involves patience and timing. As a startup, your business will not have much of a credit history established. This is where startup friendly creditors (i.e. net 30 vendor accounts) come into play. Net 30 vendor accounts extend business credit which is repaid in full within 30 days. It’s important to know that having a DUNS number established with Dun & Bradstreet is required to obtain credit from a net 30 vendor. See my breakdown of increasing your buying power with business credit financing.
Eventually, you’d have enough business credit established that you will no longer need to provide a personal guarantee and can obtain credit based on your business’s credit worthiness.
It started as the elephant in the room and is now the financing method of choice for a majority of startup businesses. With options like Kickstarter for donations based financing, to RealtyShares for real estate financing, crowdfunding provides opportunities never before thought of. The SEC defines crowdfunding as “an evolving method of raising capital that has been used to raise funds through the Internet for a variety of projects”.
Crowdfunding platforms are not all created equal. For example, Kickstarter is known for its “fixed funding” whereby startups can only receive financing if they receive 100% of their funding goal. Competitor IndieGoGo is known for its “flexible funding”, where businesses can receive financing even if they do not meet their target goal.
Your Funding Method is Your Business!
Regardless of which financing option you choose the options are available. Your approach coupled with the patience to apply the hard work that it takes to obtain the amount of credit required will prove your success.
We want to hear from you! What financing routes have you taken? We’re sure there’s plenty more out there and we’d love to hear about it.