As an entrepreneur, getting your business off the ground is one of the most difficult challenges you’re likely to face. In the early days, when you’re up and running but not quite yet established, capital to keep things going can be seemingly impossible to come by.
Traditional bank loans can be especially difficult to secure, as financers generally require at least a year or two of business history, along with a solid cash flow. What can you do when your startup needs money now?
Good news, you have options. Consider these six ways to fund your new business, from traditional avenues to others you may have overlooked.
Does your new business need a delivery van? A copy machine? A pizza oven? You may qualify for an equipment loan, even as a new business. While banks traditionally only extend financing to established businesses, equipment loans can be slightly easier to come by — and may even carry a lower interest rate than conventional loans.
Why? The rule with this type of loan is that it can only be used to purchase — you guessed it — equipment and machinery. This can be less risky for lenders because the equipment itself serves as collateral; if you default, the lender can take your equipment to cover the loan.
If your business invoices its customers, and you need funding fast, invoice financing may be a viable option for your startup. In invoice financing, a lender loans you money against the invoiced amount that your customer owes you. This can be especially helpful if you have a long payment cycle and can’t afford to wait for your customers to pay their bill.
Invoice financing can also be easier to qualify for than traditional loans. Lenders often don’t require a long business history, and approval is generally based on your customer’s credit rather than you own. Your own credit and cash flow are secondary.
If you don’t need a large loan (over $50,000), consider applying for a SBA Microloan. For this type of loan, the Small Business Administration partners with community-based non-profit lenders to offer small business loans. These loans generally feature low interest rates because the government guarantees a portion of the loan, which reduces risk for the lenders, especially when financing startups.
Low interest rates and accessibility for new businesses make SBA Microloans competitive, but you may have a leg up if you run a minority-owned business or operate in a disadvantaged area. SBA Microloan lenders focus on local communities, and often go beyond funding to provide business-based training and technical assistance.
Business Credit Card
If you have limited business history and solid personal credit, a business credit card may be a good way to finance your business. In addition to your credit, issuers will take a look at your combined income (business plus personal). The better your credit, the lower your APR will be. Beyond being fast and easy to apply for, business credit cards offer other perks.
Ideally, you want to pay off your balance in full every month to avoid paying interest. If you have good credit, shop around for a 0% interest introductory offer to buy yourself some time so you can comfortably carry a balance for up to 15 months. You can also look for a card that offers a cash back percentage or awards points.
Bonus: A business credit card helps you build up your business credit and establish that all-important business history.
Small Business Grant
While securing a small business grant from a non-profit or government organization isn’t easy, this “free” money (without interest or fees) can be well worth the effort — especially if you run a non-profit or mission-oriented business in a community that’s served by this type of funding.
Many grants are available for women and minorities, and the SBA offers a variety of grants as well. Keep in mind that small business grants are highly competitive and the application process can be lengthy, so this may not be a viable option if your business needs money fast.
Though not without its risks, self-funding your new business is worth considering if you don’t qualify for other types of financing. Always use caution when tapping into any form of your personal savings, or borrowing money from friends and family.
If your business is incorporated, you may have the option to borrow from your retirement funds with Rollovers as Business Start-Ups (ROBS). This option allows you to use funds from your IRA or 401K (without immediate taxation) to cover new business start-up costs. Downsides include high fees, increased IRS scrutiny and, of course, the risk of losing your retirement savings.
If you have excellent personal credit and solid income, a personal business loan may be an option. Just remember that your personal assets are on the line if you default. The same goes for a home equity loan. While this may be a viable source of funding for your new business, you’re at risk of losing your home if your business struggles and you’re unable to make your loan payments.
Bottom line, a traditional loan that may seem out of reach isn’t the only way to fund your new business. Think strategically to access the capital you need to keep your business running in the often challenging early days. And always be sure to weigh the risk and effort involved when considering sources for funding your startup.
This article was originally published on the author’s business financing blog and was reprinted with permission.