What are my options for financing a new business or startup?

There’s no denying that starting a business requires some capital, but getting money is no easy task. Thankfully, there are more than a few ways to get the startup capital you need, but there are certain things you’ll need to do before you go out and ask anyone for money, even your own mom. Estimating the start-up cost and ongoing operating costs of the business should be the first thing on your list of things to do. Not every lender or funder will require you to hand over a copy of your business plan, but you’ll find that a business plan will come in handy. Still, it is something you should have, whether you are starting a new business or are well established.

Friends or Family

While borrowing money from family or friends might be one option to get your business off the ground, you should think twice before you make the decision to take money from family or friends. There’s no doubt that borrowing from friends or family will put a bit of strain on the relationship. As is true with getting any loan, you must be clear on the terms of the loan. In this case, it is especially important to be clear on the repayment terms and expected interest rate. Once terms of the loan have been discussed, it is a good idea to get the loan written down on paper with all participants of the deal signing the document. The U.S. Small Business Administration, or the SBA, is a good place to start when it comes to asking friends and family for money. The SBA publishes six tips on its website.

Credit Cards or Personal Loans

The greatest reason why you might choose to use your credit cards to finance a business is convenience and speed. With credit cards, there is often a drawback of a high interest rate. If you are not careful, you can accumulate a hefty amount of credit card debt. If you have the cash to pay off your monthly credit card payments in full, it can be a good way to start your business, and in some instances rewards for business credit cards are available.

Business credit cards are also an option, but as the owner you may be asked to be a personal guarantor on all debts, depending on business structure. Late or missed payments will affect your personal credit rating, and card issuers can sometimes require main shareholders of a corporation to act as a personal guarantor for the line.

Another option is to obtain a business loan from a bank. Again, having a business plan is key because most banks will ask for a business plan and they want to see several years of past profit and loss statements. Some banks don’t finance startups.

SBA-backed loans can be a great alternative to credit cards or personal loans. You can always try to get a loan through the SBA. This is not a direct lender. Rather, it’s part of the federal government that acts as a “co-signer” and offers guaranties on loans made by participating banks. The SBA also provides training and mentoring, so it’s an option if you want to learn how to navigate the business world as well.

Alternatives to Traditional Funding Options

Another way to get money to start a business is crowdfunding. Crowdfunding started as a way to ask for donations to nonprofit groups and people who wanted to help start charity projects. Then federal legislation helped its popularity spread by encouraging alternatives to traditional funding options. It can work well for community-oriented small businesses.

You’ll need a good marketing campaign, though; crowdfunding is basically a good pitch. You’ll want to compare crowdfunding sites, too, because they may charge fees depending on your industry. There’s fine print, so beware.

Angel investors are wealthy individuals who help you get your foot in the door when your business is very young. They usually demand 20% to 25% equity in return, and seed investments are usually under $1 million. Venture capitalists usually invest larger sums in more established businesses.

How do you get to an angel? Try looking online at angel investor networks. Ask around and also look online to see if there are angel investors in your specific niche or area. You’ll need to do a good job showing them the potential impact of their investment, and the return they could expect on their money.

Retirement savings can be another source of startup money. Rollovers for Business Startups (ROBS) are a mechanism that allow people who have invested in a 401(k) to access some of that money. You can use that money to start a business without going into debt. It’s worth looking into if you plan to use more than $50,000. Setting up a C corporation to sponsor a 401(k) plan can help reduce tax penalties. It’s important to find a ROBS expert. There are specific tax rules, so make sure to ask your accountant.

Microloans also are a possibility. Microloans range from $500 to $35,000 and are typically short-term, with a low interest rate. Microloans are designed for the self-employed, startups with little capital and small businesses with a small staff. They are easier to get than a loan from a bank and can fill in the gaps.

Whichever option you choose, you can always start with the SBA Website. Also, there are Small Business Development Centers, Women’s Business Centers and Veteran’s Business Centers. SCORE has mentors ready to give you advice on growing a business.