12 Ways to Finance a New Business
Many people have had the dream of owning and running their own business. The facts are, though, that only a portion of people actually try it. And even less end up with a thriving, successful business.
A big part of that is because so many businesses fail financially. In fact, according to the U.S. Small Business Administration, about 33% of businesses fail in their first two years.
If you have dreams of having your own business, make sure you lessen your chance of failure by having a solid financial plan for your new business. Still not sure where to start?
Here are some options for financing a new business.
1. Bank Loan
Of course, a traditional bank loan is one method of financing a new business venture. Unfortunately, some banks have tightened their loan requirements making it harder to get a loan than in years past.
It also seems to be taking longer to get your loan approved. Part of the reason banks are being more cautious about lending is because of tougher economic times. Banks and other lending institutions are scrutinizing their applicants more thoroughly.
For example, your lender might want to know your personal credit history, as well as a host of other information about your new business before approving your loan request.
Be ready to answer lots of questions and provide data and information about your business in order to get a loan.
2. Refinance Your Home Loan
One way you can finance a new business is by refinancing your home. Obviously, this may not be the best way to obtain the cash you need to bankroll your new venture due to the risks involved.
One of those risks is defaulting on your loan due to inability to pay your business debts. If that should happen, you could lose not only your business but your home as well.
Whether or not you should accept the risk and refinance your home depends on several factors. Two of those factors include how much you already owe on your home and what your home’s appraised value is.
Run the numbers and think hard not only about the benefits but also the risks and results of making this move before you take any action.
3. Side Hustle
Basically, the side hustle as a way to finance your business venture involves you getting a second job. But there are drawbacks to this option as well. One such drawback is that you start being so tired you have no energy left to continue with your plans to start your new business.
Another is lacking or running out of time to work on your business as a result of spending more time working for someone else.
If you side hustle for a few years first and set aside that extra money, you could be in business before you know it. But beware of the temptation to use that money for things other than its intended purpose.
Should this happen, it is entirely possible you’ll never reach your goal of having your own business. You must be very hawkish to protect that money for the payday that will come if you can make this side hustle work for you.
What if you sold your nearly new car and bought an older model? Or, could you sell your home and move to a smaller less expensive one? Thinking outside the box and taking steps to reduce your personal expenses could provide you with the money to get your business started.
5. Life Insurance
Did you know it is possible to borrow against your life insurance policy? You may not even have to pay back the loan. It may be deducted from the death benefits that are paid to your beneficiaries.
However, you will be charged interest and it will be compounded, meaning you’ll pay interest on the interest.
Additionally, it is possible to end up owing more than your policy is worth. If that happens, you may find a notice of taxes due in the mail from the IRS. Know the risks involved before you decide to take this option to fund your business start-up.
Be sure to get solid financial advice before going this route.
6. Credit Card
Another risky option that some people have chosen to get the money needed for their new business is to use credit cards. Paying only the minimum spells bad news and non-payment or late payments will show up on your credit report.
If you only use it once in a while and pay back what you borrow promptly instead, it may be ok to use when you really need it. But it’s probably not a good option to finance a new business entirely with a credit card.
7. Find a Partner
If you have a friend or family member with the capital and you have the business knowledge, perhaps you should consider bringing a partner into the equation.
Clearly defining your roles and what happens if one person doesn’t hold up their end of the bargain is a good idea. Therefore, to protect your interests and that of your partner it is best that you draw up contracts for both of you to agree on and sign.
8. Cash in Retirement Savings
Some people have cashed in their retirement savings in order to have the needed money and resources to start their own business. This is another move that isn’t without huge, uncomfortable risks.
One is penalties for withdrawing funds from your retirement account if you’re not yet of retiring age. Also, what if your business fails? You could end up penniless with no income and no retirement savings. But if you are really determined, this can be a possibility.
You could use crowdfunding to start your own business. It works by allowing you to put your money with the money of other people to invest in your business.
10. Get an SBA Loan
The U.S. Small Business Administration offers guarantees on loans that can help new and small businesses get off the ground.
There are several qualifications that must be met in order to get the loan approved. One such requirement is that you have to have applied for and been turned down for a traditional loan already.
Also, you have to meet their definition of a small business. Then if you meet all of the qualifications, you still have to be approved through a traditional bank, which can be tough as their requirements can be even stricter.
11. Product Presales
Have you considered selling your product before your business is fully off the ground? Some people do this as a means to get the ball rolling and start their businesses.
If your product is completely developed, it may be an option for you to explore. It could prevent you from having to take out a loan to fund your new business.
12. Micro Loan
If you have little to no credit history, you may still be able to get a microloan. These loans are small enough that commercial banks won’t lend the funds and instead they are offered through microlenders.
They don’t need as much documentation as regular banks do, but they can charge higher interest loans than you may see in a bank.
Having your own business is possible even if you are having trouble saving enough on your own. Just make sure you weigh the risks carefully before deciding how to fund your new business.