Are you planning to open a business but have no idea where to source funding? Then it is your lucky day, as this article focuses solely on the best sources for business startup funding.
Startup funding, also known as startup capital, refers to the money required to launch a new business. It comes from various sources and can be used for any activity that helps the startup go from an idea to an actual company.
Unfortunately, for startups, it is not easy to access funding as compared to established businesses. The probable reasons are lack of business history, established credit, and substantial income. Fortunately, that does not mean you will not be able to fund your new business. Read on to discover more;-
Small Business Administration Loans
Initially, the SBA microloan program was created to make startup funding more accessible for veterans, women, and other minority groups. It partners with community-based NGOs and intermediary lenders to provide small business startups with financing from as low as $500 to $50,000.
What’s more, the interest rates are favourable – between 8% and 13% – which are uncommon for new businesses outside this SBA-subsidized program. Under this program, SBA microloan lenders also act as lenders. They offer advice on business management, marketing, and finance to ensure the success of the borrowers.
Despite its many desirable perks, the application and approval process of SBA loans is long and challenging. Borrowers may find themselves jumping through what they consider unnecessary hoops to remain compliant with the program’s requirements.
- Desirable interest rates
- Mentorship program
- Term lengths do not go beyond six years
- Stiff competition
- The long torturous application process
Suppose you are an entrepreneur with a strong personal credit and a fresh business idea worth risking your finances for. In that case, you may want to consider taking a personal loan for business. Generally, a personal loan tends to have lower interest rates and more straightforward repayment terms. For this reason, you can use it for nearly any purpose.
However, there is one major setback;- as you take the loan, the lender is entering into a legal contract with you as an individual and not the business. Should misfortune strike and the company fails, you are entirely liable for the outstanding balance repayment.
- No hidden fees
- Easier repayment terms
- Lower interest rates
- Straightforward application and approval process
- It leaves you vulnerable in case the business fails
Business Lines of Credit
Those looking for flexible sources of income for their new businesses should consider a business line of credit. Often described as a hybrid between a traditional business loan and a credit card, a credit line is an amount of money established by the lender with a maximum credit limit.
On your end, you can borrow up to any amount for nearly any business purpose as long as you do not go beyond the credit limit. Its most significant advantage is that you only pay interest on the amount you have used over a particular time. For example, your credit limit maybe $30,000, but if you only withdraw $5,000, you will pay interest for the money on the money you are using.
- You can withdraw money anytime
- Provide flexibility for changes in business cash flow
- More accessible to those with not so perfect credit scores
- An excellent way to begin building a business credit history
- Many banks may be fearful about lending money to new business
- Most lenders may require you have at least six months of business history
Friends and Family
With limited startup funding options, most small business owners turn to their family and friends. After all, these are the people who already believe in what you are pursuing. You do not have to convince then the way you would an investor or a bank lender.
Undoubtedly, family and friends are a great source of funding. However, it is crucial to outline a working relationship. If possible, get legal documentation for every transaction and ensure your loved ones understand that they may not get any returns. As good as it sounds, some entrepreneurs choose to avoid this type of startup because of the potential complications.
- Easily accessible
- Little or no interest rates
- Flexible repayment terms
- May complicate personal relationships
Being a startup business is quite challenging, especially when finding the right source of funding. Fortunately, there are endless avenues out there willing to give you a helping hand. Yours is to recognize the most befitting to your needs and preferences.