It takes money to make money. In reality, however you (legally) acquire the money to start your business is up to you. A multitude of options exist to gather the funds. This article will illustrate some of the more popular means of acquiring startup capital, along with the pros and cons of each.
Before weighing each option, let’s accumulate all of the different ones. Options for acquiring startup money are credit cards, friends & family, crowdfunding, and loans, which have their own breakdown. The options regarding loans are personal loans, home equity loans, and microloans.
Much like using a credit card, taking out a personal loan involves APR and fees for not paying back on time. With a good credit score and history, a personal loan can be ideal, especially if paid back quickly. The PROS of a personal loan are that the money can come quickly, it can build credit, and it is especially helpful for small expenses that can be paid back quickly. The CONS of a personal loan include high
APR, fees, and the possibility it was not enough. But here at American Business Credit we look to work with you to get your startup business the money it needs to succeed.
Seemingly the easiest route to take would be using credit cards. Very convenient, but also very risky, a strong credit score and credit history will benefit you if you go this route. If you do, make sure the credit card is in the name of the business, in order to boost your business credit score. The PROS here are building credit further, the convenience of using an already-managed account, and (if your score is high enough), a low annual fee. The major CON here is the risk of incurring the many fees applied for late payments, annual upkeep, transfers, etc. Relying too heavily on a credit card is a fast-path to failure, unless everything runs perfectly smoothly. (When does that happen?) For more info on using a credit card to start your business, click here.
Friends and Family
It may seem awkward to ask your loved ones for money, but remember, this will be an investment, not just a gift. Be confident in your business plan, and when you present it to friends and family, present it as if you were presenting to a lender. Carefully consider who in this realm you approach, and be honest but realistic about what you need. Also, just because you may love and trust them, make sure everything is in writing.
The PROS here are that your credibility is already established, there may not be an annual fee or an APR, and the actual acquisition of funds may be quicker. The CONS here are that you may strain a relationship if everything does not go smoothly, you may be less likely to take legal action if necessary, and this type of borrowing does not directly improve your credit score. For more info on utilizing friends and family as a source of startup money, click here.
Crowdfunding is growing in popularity rapidly, sometimes for better and sometimes for worse. The idea here is to present your plan to the public and allow for an intake of funding from a wide array of sources. Maybe you’ve heard of Kickstarter? It and several other options exist to crowdfund. The PROS here are the multiple lenders available, the convenience of compiling all donations into one package, and the fact that is costs almost nothing to start. The CONS here are that it can take lots of time, you have to set a goal to reach which if you don’t, you get nothing, and there should be some sort of reward/incentive for each lender, which can get costly as the number of lenders goes up. For more info on crowdfunding, click here.
Home Equity Loans
For homeowners only, provided you have at least 20% of the house paid off, a home equity loan can be taken out. Up to 90% of the equity can be borrowed, and the APR is usually very low, since you’re essentially borrowing against yourself. The PROS here are the very low interest rates, the net of the loan (depending on the worth of the home), and the fact you can apply for this at your local bank. The major CON here is that if unpaid or not paid on time, you could lose your home.
Perhaps the single most popular method of funding a startup is the microloan. These are smaller-sized loans offered by lenders with high forgiveness. If your finances are a bit shaky, consider a microloan. On the side of small businesses, microlenders traditionally help those who may not qualify for other larger loans. The PROS here are the consistently fair loan terms, the relatively low APR, and the fact that your previous credit is not as much of a factor. The CONS here are the lengthy application process (up to 6 weeks) and that the loans are indeed micro, and may not be sufficient.
Ultimately, it’s up to you how you fund your business. For every option here there are a dozen others. We hope this is a good place to start. Click here for more information on the pros and cons of the options available to you.