If you dream of giving up the nine-to-five life and starting your own business, you’re not alone. According to the Ewing Marion Kauffman Foundation, the number of startups increased dramatically between 2014 and 2016.
However, bringing that dream to fruition can be expensive, and finding business financing can be difficult. It’s important to understand all your options so you can get your idea started.
6 business financing options
When it comes to financing, you need to consider your business’ stage of development, how much you want, your credit score, and if you’ll have ongoing financing needs. Once you have that information in place, you can choose one of the six forms of financing available.
1. Business loans
If you need money to expand your business, hire new staff, or buy new equipment, a business loan is a good place to start if you have an established company.
Business loans are excellent choices because they give you a layer of protection. If your company fails, the lender can only liquidate your business assets. They cannot touch your personal assets, and your credit score will remain intact. That benefit can be financially invaluable if your idea doesn’t work.
Most banks and credit unions offer loans. To apply for a business loan, make sure you complete the following steps:
- Create a business plan. Most business loan lenders will require you to submit a company plan that outlines your business structure, market strategy, competitive analysis, development plan, and financial information.
- Know how you’ll use the money. Many lenders will ask you to specify how you’ll use the money. Make sure you have a concrete plan for what you’ll buy or how it would help you expand your inventory.
- Collect documentation. Besides a business plan, you’ll also need to provide lenders with your personal and business tax returns, bank statements, and annual report or statement of finances.
Although business loans can help you finance your goals, you might have trouble getting one if your venture is in the early stages of development. In fact, you might find only lenders with high interest rates are willing to work with you at first. But these interest rates can be well into the double digits, causing your loan balance to grow over time.
If that’s the case for your situation, it might be worth exploring other options first.
2. Small Business Administration (SBA) loans
If your business is new, you might not be able to qualify for a business loan. Often, lenders require businesses to exist for several years before they’re eligible for loans. Instead, you might have better luck applying for an SBA loan.
The SBA works with banks, credit unions, and development organizations to offer low-rate loans to those starting a new business or running an existing one. The SBA guarantees a portion of the loan, reducing the risk for the lender. Because there’s less risk, banks and other financial institutions can offer lower rates.
Depending on your needs and the status of your business, SBA loans can range from $500 to $5.5 million in value. You can use the loan for fixed assets, such as office furniture or equipment, or working capital.
Each lender that offers SBA loans has their own eligibility requirements in terms of credit score and income. In general, you must meet the following criteria:
You run a for-profit business.
You do business in the U.S.
You’ve invested your own time or money into the company.
You cannot get financing from other lenders.
You can use the SBA’s lender match tool to find approved lenders near you.
3. Personal loans
If you don’t qualify for business loans or SBA loans, another option to consider is taking out a personal loan. Depending on your goals, you could borrow as much as $100,000.
Personal loans are often easier to get than other forms of debt. Some personal loan lenders will issue loans to borrowers with credit scores as low as 580. Plus, personal loans don’t usually require collateral, which means none of your assets — such as your home or business — are at risk.
Depending on your credit, you might even be able to get a loan at a low interest rate. Some lenders offer loans with interest rates as low as 4.99%.
However, there are some drawbacks to using a personal loan for a business. With a personal loan, you’re responsible for repaying the debt no matter what happens to your business. If your business enters bankruptcy, you’ll still need to keep up with the payments on your loan. When you fall behind, your personal credit can be damaged, and the lender can send you into collections.
If you have poor credit, you could still qualify for a loan. However, you could end up paying much higher interest rates.
For example, pretend you needed $50,000 for your business and you had an excellent credit score. You could qualify for a five-year loan at 4.99%. Over the repayment term, you’d pay back just $6,600 in interest.
However, you might only be able to get a loan at 35.00% interest if you have less-than-stellar credit. If you took out $50,000 at that interest rate and repaid it over five years, you’d pay back $56,471 in interest charges alone. The cost of your loan would more than double due to the higher interest rate.
You can use our personal loan calculator to find out how much you’d pay in interest.
4. Business credit cards
Using a credit card to fund your business can be a smart decision. If you need access to revolving credit, a credit card can be a better choice than a business or personal loan.
Using a business credit card rather than a personal one can also make your life easier at tax time. You can simply review your card statement for purchases and payments, without worrying about checking for personal expenses. In addition, a business credit card can help you establish your business’ credit history, making it easier to get a loan later on.
Some business credit cards offer rewards, such as cash back for your purchases, which can stretch your budget further. They might even have a zero-interest promotional period.
However, getting a credit card is only wise if you have good credit. Otherwise, you could get hit with expensive interest rates that can cause your balance to grow.
Another thing to keep in mind is that your card usage can affect your personal credit. Some card companies report your activity to credit reporting agencies, which can impact your credit score if you fall behind on your payments.
Worse, some companies will require you to sign a personal guarantee for the credit card. That means that you’ll be responsible for paying off the card balance even if your business fails. Unlike business loans or SBA loans, your credit card balance might not be dissolved when your company enters bankruptcy.
5. Angel investors
An angel investor is a wealthy individual who invests their money in businesses and startups. An angel investor can also supply more than just capital. They can offer business advice, connect you with suppliers or other investors, and even expand your client base. In return for a loan, the angel investor gets equity in the business, earns money from returns, or gets royalties from your products.
When seeking out an angel investor, it’s important to remember accepting a loan will often mean giving up at least some control of your business. In some cases, that can be worth it to get an experienced business advisor, but it can shift your company’s dynamic.
To find an angel investor, you can post your project on the Angel Investment Network.
If you need business financing but can’t get a loan or a credit card, don’t give up on your idea. You could get your business off the ground by crowdfunding.
It can be a powerful option. According to crowdfunding site Kickstarter, 15 million people have pledged over $3.7 billion to fund more than 143,000 projects since the site launched in 2009.
With crowdfunding, you use a site such as Kickstarter to post your idea and funding needs. You can share that post on social media to bring attention to your goals. Individuals contribute money — sometimes a few dollars, sometimes thousands of dollars — to support your project.
The money these people contribute isn’t a loan. Instead, they’re repaid for recognition. For example, you might thank those people on your website or send them a prototype of your product.
However, you shouldn’t depend solely on crowdfunding to get financing. There’s no guarantee that your post will attract attention or the funds you need. Plus, you only get the money backers pledged if you meet your funding goal. If you raise less than that amount, you cannot access the funds.
Starting a business
Becoming an entrepreneur can be exciting, but finding business financing can be challenging. By doing some research and choosing the best option for you, you can launch your business without risking your own money.
For more information, learn how to start a side business.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|