Top 7 strategies for funding start-up costs

JohnTaylor December 7, 2011 0

Getting your small business off the ground is likely going to cost money. In fact, according to a Wells Fargo/Gallup Small Business Index study, the average small business start-up cost is about $10,000. Finding the money to fund these costs is probably the most important early hurdle you’ll have to clear before getting your business up and running.

According to the Wells Fargo/Gallup Small Business study, the majority of small business owners fund their start-up costs from personal savings, while more than a third obtained loans or lines of credit to launch their businesses.

If you’re looking for start-up funding for your small business, consider the following options:

- Government grants and loans. The Small Business Administration makes a variety of loans available to small business entrepreneurs. The SBA Express program can help business owners get quick access to funding for their business with expedited bank loans. SBA Express loans can be made for up to $150,000 and loan decisions are made within 36 hours. The SBA can also help guide you to government grants and other programs that you may be able to use to get started.

- Community banks. Community banks specialize in making the type of small loans necessary to start a small business. They’re also less constrained by corporate rules about who they can lend to than the big banks, making it more likely that they can lend money to you. Credit unions typically can offer loans at lower rates because they are non-profit, and the money they make is directed toward keeping borrowing costs low.

- Credit cards. Credit cards can be a source of funding for small business and other ventures. (Director Kevin Smith funded his breakout movie Clerks almost entirely with credit cards.) As credit cards have high interest rates, this can be a risky move and should be considered only if funds can’t be found elsewhere.

- Investors. Angel investors are essentially wealthy individuals who invest in high risk new ventures for convertible debt or ownership equity. Angel investors typically invest in tech start-ups. Angel investors can be a great help for starting businesses, but typically expect a high rate of return on their investments.

- Partners. Bringing partners into your business can help you secure funding for your business, particularly if your partners are more well-heeled than yourself, or if they have better connections to lenders. The downside is that by bringing partners into the business, you’ll have to share decision-making and profits.

- A home equity loan. By tapping the equity in your home, you can secure a loan to help fund your business as it gets off the ground. The downside of this is that it will extend the life of your mortgage, and if your business fails and you are unable to meet payments, you could lose your home.

- Personal loans. By soliciting funds from friends and family, you can avoid the hassle of dealing with banks and financial institutions and likely enjoy zero or little interest. However, borrowing money from family or friends can put great strains on relationships, particularly if you become unable to repay the debt.

These are just some of the methods of funding a start up. Before beginning your search for start-up funding, experts suggest that you spend extensive time on your business plan to ensure that you have a clear mission for your business and a solid estimate of your expected profits to present to lenders.

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