By Tracy Vides
One of the biggest hurdles that any aspiring entrepreneur faces is financial. However, securing funds to start and grow your business idea into a sustainable venture is definitely not as scary as many make it out to be. Newfangled financing options like crowdfunding receive a lot of attention, but few people dare to undertake a crowdfunding project as they are deterred by the amount of work it requires and the uncertainty of even reaching your target amount.
However, there are a bunch of ways to fund your business idea with very limited risk and extremely reasonable interest rates. Here’s my pick of the top five among these.
Yes, dear readers, dipping into your own pockets is and will always be the most reliable way to ensure your business has some seed capital. There’s a different high in building a business with zero debt, just your own sweat blood and tears. Here it’s important to mention that bootstrapping does not always have to be using just your own savings. You can also bootstrap by keeping your operating costs really, really low – work out of home or your garage, maybe? Many startup entrepreneurs opt for sweat equity and forsake taking home a regular salary or a share in the company’s revenues for as long as it takes for the startup to establish itself and make a profit. Usually there’s a spouse or partner whose income tides over such situations.
It may seem tough, but hey, some of the biggest brands in the world were built by bootstrapping – Apple, Facebook, Microsoft, Coca-Cola – need I go on? So if you have a bright idea, don’t feel bad about loosening those purse strings. After all, if you don’t believe in your own idea, who else will?
2. SBA Loans
Most governments offer cheap, subsidized loans to small businesses. The United States Small Business Administration (SBA) offers a variety of loans which are disbursed via local banks and private lending companies to startups in need of seed capital. While these loans typically do not have high interest rates, they definitely require a lot of paperwork and persistence to bag. Before you approach the SBA use a simple loan calculator to determine how much will be the real financial impact of taking such a loan.
There are three primary types of loans that you can consider from the SBA.
a. SBA 7(a)
The SBA 7(a) is the broadest of the loans offered by the SBA and also tends to be cheaper than commercial loans. It covers working capital, land and infrastructure requirements. Repayment periods vary from 7 years to 25 years, depending on the use case for which the loan is taken. It requires collateral in the form of property and also requires all owners with over 20% stake in the company to offer personal guarantees for the loan amount. The maximum amount of loan available under this program is $5million and this is subject to a range of eligibility criteria which are often very tough to crack.
b. SBA 504
The SBA 504 program offers loans for buying land, equipment, and setting up or upgrading infrastructure for your business. This loan has two intermediaries – the local bank as well as the Certified Development Companies (CDCs). It offers the same maximum amount as the SBA 7 (a) but offers longer repayment periods of 10 to 20 years. The equipment bought using the loan amount can be used as collateral.
c. SBA Microloan
This program offers a much lower amount as loan to potential entrepreneurs – a maximum of $50,000 and has higher rates of interest. The maximum repayment period is six years and the personal guarantees and collateral required are decided by the local bank or intermediary.
3. Loan Against Life Insurance
Many life insurance policies don’t just cover your life and protect your family’s interests, they also allow you to take a loan from the cash value of the policy. These are typically whole life policies (unlike a term policy) and entail a higher premium payment from the insured individual at the beginning of the policy. This is a very different type of loan – one that you have the option not to repay.
You will be charged interest on your borrowed amount, but if you are unable to repay the loan amount and / or the interest amount, this unpaid balance will either be deducted from the life insurance payout made to your heirs after your death. Alternately, if the loan plus interest amount exceed the total payout value of your insurance policy, and you don’t repay the insurance company; your insurance coverage can be revoked and any gains made using the amount will become taxable.
4. IRA Financing
Most Americans who have held down full time jobs for at least a couple of years have something called the IRA or the Individual Retirement Account. This is an account into which the individual contributes funds from their salary every month. In many cases the employer contributes a certain percentage towards this fund as well. Together, this combined sum is not taxable, earns interest for the individual and is accessible post retirement as a source of sustenance.
However, these IRA funds are not locked away till you retire from your salaried job. You are allowed to temporarily withdraw and replace the funds within your IRA. You are expected to replace the withdrawn amount within 60 days from the date of withdrawal, else you will be slapped with a premature withdrawal fee and the unpaid amount becomes taxable. So this is a definite avenue that you can turn to for tiding over your business in its early days or during a lean patch, as long as you ensure that you return the funds within 60 days. The best part of IRA financing is that it is interest free and does not require you to present your credit worthiness to various agencies before accessing a source of funds.
This is a relatively new form of financing a new business and offers small loans to businesses that can’t get loans from traditional lending institutions. Micro-financing is typically easier to get than regular loans and often carries high rates of interest of 9-14%. Loan amounts can range from as low as $500 up to a $100,000 where repayment periods are usually short – between 6 months to 6 years.
Consider micro-financing to cover operational costs – use it to get working capital, instead of spending it on fixed assets like land, equipment, etc. There are tons of microlenders out there that you could tap based on your industry, location, or the size of funds required. Whereas most microlenders are community based and lend within a small geographical region, there are online microlenders like Kiva or Kabbage that offer you microloans no matter where you’re located on the planet, without the hassles of chasing after banks and other intermediaries for months.
Entrepreneurs are the wheels on which our economies roll along. Modern economies are structured in a way that encourage this spirit of entrepreneurship whether it is through technology, legislation or even community support. All it takes is some dedication to hunt down the right financing option for your business idea and the sky is the limit!
Tracy Vides is a content strategist and researcher who gives small business and entrepreneurs marketing and social media advice. Tracy is also a prolific blogger – her posts are featured on Tech Cocktail, She Owns It and Business 2 Community. Connect with her on Twitter @TracyVides for a chat anytime!