Whether you are looking to start a business or make an investment to increase revenue, the first step is getting the capital you need. As excited as you may get about a loan or an investment to finance your business, you also need to understand the risks and dangers of each different type of funding.
Source 1: Neighborhood Bank
The first place small businesses tend to look is the neighborhood bank, but it might be the last place able to give you a loan. If you have a credit score under 600, been convicted of a felony, had a bankruptcy, or are under a tax lien, it is unlikely you will be a candidate for a bank loan.
What It Is: a business loan or a line of credit
Based On: your business performance and assets
What It Costs: $300 – 1% and up fees plus 4-7%
Typical Amount: $50,000-$100,000
Years in Business: 3+
Personal Guarantees: yes
Source 2: Micro Loan
What It Is: small loan when a bank can’t lend to you
Based On: assets/collateral, personal credit
What It Costs: fees plus 8-12% interest
Typical Amount: $5,000 – $15,000, but up to $350,000
Years in Business: flexible
Personal Guarantees: yes
In Columbus, there are two main micro-lending sources. The first is KIVA, a national program administered locally but the Small Business Development Center. To receive this loan you will have to raise a portion of funds yourself from friends and family.
The other is ECDI, one of the largest SBA intermediary microlenders in the country. They have one program specifically for food truck businesses where they will provide $75,000 for a food truck, as well as programs for contractor loans, veterans, minorities, and immigrants.
Source 3: Personal Loan
What It Is: home equity or personal loan
Based On: personal credit
What It Costs: very low fees and rates
Typical Amount: $5,000 – $50,000
Years in Business: not applicable
Personal Guarantees: yes
It may be important to get this loan before you start the business, or the performance of that business might have to be included in the loan request. You should also keep in mind different major life changes you could face that might make repaying the loan more difficult. Even if the business doesn’t succeed, you will still be on the hook for that loan. It is important to note that this personal loan is probably not going to be a business deduction.
Source 4: Venture Capital
What It Is: startup investment and resources
Based On: product, team, and growth potential
What It Costs: You will give up some equity in the company, a portion of control, and the time it takes to continually search out new capital.
Typical Amount: $50,000 – $100,000
Years in Business: potentially pre-revenue
Personal Guarantees: no
Before you consider seeking venture capital funding, you should be aware that investors make their money when a business sells, and they will encourage you to do just that. If you are looking for a business to run long-term or pass down generationally, this type of funding is not for you.
Source 5: Crowdfunding
What It Is: through social media, usually Kickstarter or Indiegogo, people contribute money to your idea in exchange for a reward for participation
Based On: your story and audience reach
What It Costs: time, rewards, and campaign costs
Typical Amount: averaged at $10,000
Years in Business: pre-revenue
Beware Of: tax consequences and legal issues
One valuable tool is the website crowdfunding.io, which has a calculator to gauge a realistic expectation for what you can raise with your campaign. It will ask you a series of questions about product, campaign efforts, and reach to help you determine if a crowdfunding campaign would be a good fit.
Source 6: Asset Lenders
What It Is: a loan secured by a specific piece of collateral
Based On: often customer receivables or purchase orders
What It Costs: fees and interest
Typical Amount: dependant on collateral
Years in Business: flexible
Personal Guarantees: not always, personal credit may be a factor
This financing source only works if you have a lendable asset and will require a relationship, not just a transaction, because they need to know the history of your customer’s ability to pay their bill.
Source 7: Retirement Funds
What It Is: borrowing from 401k, IRA, or ROBS
Based On: value of retirement plan
What It Costs: fees and interest, often high opportunity cost
Typical Amount: varies based on retirement plan
Years in Business: either borrowing a portion of your 401k and repaying yourself or a self-directed IRA loan from a friend, investor, or family member
Beware Of: rule complexity and triggering distribution
Using retirement funds can get extremely complicated and we would recommend a financial advisor if you are considering this option.
Bonus: The IRS
Business owners make estimated quarterly income and self employment tax payments to the IRS. You can skip mid-year estimates without penalty if you make it up by January. If you don’t have enough cash to make it up, that is where this comes in.
What It Is: IRS installment agreement
Based On: how much you owe the IRS
What It Costs: low fees and 6-8% interest
Typical Amount: up to $100,000
Years in Business: up to 8 years
Personal Guarantees: yes
The government can use levies, wage garnishments, and asset seizure if you don’t pay the installment agreement. They also have the power to create a tax lien, which will drop your credit score and potentially prevent banks from lending to you. This method will almost certainly result in stress for you, your family, and your business partners, but it still might be better than putting that debt on a credit card with 20-30% interest.
If you have any questions about funding, Cultivate can help. Fill out this short discovery form for personalized matching to funding sources and introductions to our network of experts.