Funding Sources for Your New Business
This is the next episode in our series “Things to Know Before You Start a Business”. In this week’s episode we’re going to talk about where to find the money. Last week we talked about capital that you would need to start a business, this week we’re going to talk about where it is you might be able to find that.
There are basically two sources of funding. One is called equity. Equity is what you own. That would be resources that you actually possess. The other one is called debt and we’ll get to that in a minute. Let’s talk about some equity sources of funding that might be useful to you.
Number one is your personal savings. I’ve been counseling people that go into business for years. It’s amazing how many come and talk to me hopeful that they can get a grant somewhere to start that business. Unfortunately, there was a time here in the United States when grants were indeed available, but they haven’t been for about 15 years or so, they’re not available.
So you got to find money somewhere. You need money to start a business. We learned last week that 51% or 52%, I forgot exactly the number, of people who start businesses do so with $5000 or less, and 64% start with $10,000 or less.
You don’t need always huge amounts of money, but you do need money.
One source of that, of course is your personal savings. We recommend that if you don’t have personal savings that you embark on a program of saving now with the object in mind of being able to go into business. This works all the time. Lots of people save for two, three, four, five years, until they have enough money to be able to start their own business.
The second, of course, would be fund that you get from your family and friends. And unless you’re a complete outcast, usually you can get some funds. Your family or friends will loan you some money, maybe they’ll even give you some money to get a business started, and that’s a good source to go to, you can find it from them.
Another one is from taking on a partner and getting contributions from that partner. We’re going to talk about business structures in the future episode. Partnerships are fraught with peril. They are risky, so be very, very, very careful about partner’s contributions. Terms and conditions are a very important thing to look at when you’re doing that, however there are many people who have started businesses with partners and have done so successfully. That might just be the thing for you to do.
The next source we’re going to talk about is debt, and that will be money that you owe, that’s borrowed money from somewhere. Of course, the number one sources are banks and credit unions. To get money from credit unions are sort of a unique thing here in the United States. If you work within a certain industry, a certain segment or a certain location, you can belong to a credit union. Our credit unions that have to do with people who may belong to schools or teach in schools, work in schools, they have credit unions. Many other organizations do as well.
If you go to the bank, you can go to them and borrow some money from them. There are what we call community express microloans here in the United States. You can check through the SBA, Small Business Administration, here in the US about finding where these microloans are.
These are for small loans up to $35,000 for purchasing inventory supplies, furniture machinery, fixtures or equipment. These loans are administered and delivered through nonprofit organizations. One good source here in our area is the Goodwill micro-enterprise program. You might check with Goodwill industries in your area and they may have a micro-enterprise program. They’re great because they work with you on your business plan, to refine and focus on your business idea, they talk about marketing, they talk about all these facets of running a business and they help you get a small loan to get up and started. So that’s a good place to go.
Now, wherever you go, if you’re going to borrow money of $50,000 or more, that’s often guaranteed by the SBA, by the Small Business Administration, but that is not a grant, Therefore, you have to get a loan like you would any other loan.
You’re going to have to be able to prove that you have good credit and that you’re likely to pay this loan back. They will expect you to contribute 30% of your own equity. So if you’re going to borrow $100,000, they’re going to want to see $30,000 from you. You’re also going to need a credit score over 700 and they will want to see a business plan.
We’ll have episodes, we actually have an entire video series upcoming in the future, I can’t tell you exactly when, but we will have it for creating a business plan, and we’re going to work on a small abbreviated form of that before this series is over.
Now, do not borrow, do not borrow from payday loans, title loans or any short-term lending sources. You’ll see them advertised on television. Payday loans keep you trapped. They have exceptionally high interest rates. They have exceptionally short lead time to pay it back. Title loans or car title loans are in states that outlawed payday loans because they’re such a shark-like environment.
Title loans are where you take in the title to your car, you give the title to them, and they hold that as a collateral against the money that they loan to you. And if you don’t pay it back you lose your car. A very, very bad thing to do. Do not borrow from payday loans, from title loans, from any short-term lending source and that, of course, includes credit cards, which are not recommended because interest rates range from very low, but you have to have very, very, very good credit to get a low interest rate credit card, up to like 30%, just outrageous amounts. And it’s very hard to pay back the loan at that high rate and ever see a profit in your business. So don’t borrow from those.
Now there’s some alternative sources you can go to for crowd funding and crowd sourced microloans. And that is of course Kiva, Ulule, CircleUp, IndieGoGo, RocketHub, Kickstarter and GoGetFunding. You can check all of these out, just add a .com behind any of these. There are ways to raise money in the cloud or through crowd funding.
Now, if you just have a business idea and you put that business idea up there, if it’s not well marketed, if you do not gather a large circle of people who are interested in you and who trust you, who believe in you, you’re not going to get very far with that either. But it is a good place to start.
These are the sources where you can go and get capital. You will need money, if you’re going to find it, find it from one of these, remembering those places I told you not to go to, and we’ll see you next week on the next episode of The Things You Need to Know Before You Start a Business.