Fund A Startup Business

Do you have a great idea and a passion (and a plan) to turn it into a business? We applaud you! Starting and running a business is as much (or more) a part of the American Dream as is home ownership. These days both can be particularly challenging – but not impossible.

Though you won’t find direct government grants to start your venture, there are still traditional means available to Find Money To Start A Business. Some examples include government-backed and commercial loans now being made easier to get, loans for new equipment, for investing in a franchise, and the Small Business Loan Fund program for community banks.

Intimidated by the traditional financing approach? If so you should investigate new internet-based funding opportunities such as Crowdfunding. Check into Microfinancing Opportunities for resources and support for ventures started by people without access to capital or knowledge about financing. And read on to discover what is working now in terms of obtaining startup money.

When we talk about traditional ways of raising money for a startup business we are primarily talking about getting loans from banks. Yes, money is tight – but it is out there and banks are interested in a good return for reasonable risk. Here are some approaches to try in order to fund your dream:

NEWS: For women but not just for women: The SBA has announced a new competition that includes cash awards totaling $30,000! They recognize the growing importance and numbers of women in the workplace and want to stimulate the development of products and services that have a big impact on women and families. They encourage entrepreneurs to create products/services that have that impact, have a potential for commercialization, and fill a need in the marketplace. Could that be your big idea? The product doesn't have to exist yet – anyone who is a citizen or legal resident can apply. Initial competitions will occur locally, managed by host organizations, and each of those will select a candidate to contend in the final competition judged by the SBA. So check it out if you have an idea (or maybe even a prototype?) that could fit this bill, and see if you can win some cash to jumpstart your business! The final application will include a business plan in addition to other information about the product/service. Initial competitions will take place during March 2015 so there's no time to waste!

Also for women: check out our newest article about resources for women entrepreneurs: Business Help For Women.

Don’t ignore the possibility of getting some equity cash out of your house to use to fund your business! Even if you don’t have a ton of equity in your house there is a great way right now to get cash out of your house — and even reduce your cash outflow when you do. You may have been ignoring the HARP program because you didn’t want to bother or you assumed you wouldn’t qualify but you could be very, very wrong. The requirements have loosened and you could refinance, reduce your monthly payments, AND take some cash out. Discover more in our review of the HARP program!

Did you know that you can use your IRA funds to start your new business — without getting hit with taxes or with an early withdrawal fee? It’s complicated, but it is possible to do.

The Wall Street Journal tells the story of a couple in Vermont who wanted to start their own franchise of a health care business. They had lots of money but it was invested in their IRA’s. If they withdrew funds they could be hit with a 10% penalty for withdrawing before they were age 59 - 1/2 as well as paying taxes on the withdrawals. But then they discovered the “ROBS” — (not a great name, huh?) It stands for Rollover as Business Startup Plan. They worked with a registered investment adviser and it only took a couple weeks to get access to their funds without being subject to taxes on withdrawal from their IRA’s. We don’t know what it cost to pay the investment adviser but we’re sure it was less than being taxed and penalized for their withdrawals. And they did get to start their new business.

You would definitely need the help of an experienced advisor, and some of them don’t care for the ROBS plan. Basically you start a C corporation with a simple 401(K) plan managed by a 3rd party. Then you can roll your IRA money over into a new plan that buys stock in your new corporation. Like we said, it’s complicated. But it may be just right for you, so see a highly recommended advisor if you’re interested…

An article in Entrepreneur Magazine discussed the top ten ways to fund a new business and prioritized them, all with some advantages and disadvantages. They strongly recommend reviewing each one and make your own priorities in terms of what might be best for you. Their options include approaches we review in more detail in this article. Their rankings, for those they consider the most desirable to least desirable were:

1. Fund your new business yourself. Use your own savings so that you don’t have to give up any equity or control.
2. Turn to family and friends to invest and support your efforts;
3. Look for a small business grant on grants.gov. (Our note: these grans are not plentiful and are often for very specific, highly technical or scientific areas. But they’re not out of the question! Our review of grants.gov includes step by step instructions for getting the most useful results from your search.
4. Try crowdfunding. Many new businesses have gotten started this way. Take a look at our article about Crowdfunding.
5. Pitch your story to groups of angel investors in your local area.
6. If your idea is really big, try venture capital investors. They want large opportunities that require funding amounts in the millions.
7. See if you can get into a business incubator or similar group. They can be tough to gain entry to but they offer a lot in the way of facilities, mentoring and sometimes some seed funds.
8. See if a customer or strategic partner will help by giving you an advance.
9. Barter your services or expertise for things like office space or accounting or legal services.
10. Go to a bank for a loan or credit card line of credit. (Not fun. Try the SBA first and see if they can help you can find a subsidized loan. and take a look at our review of the SBA website and how to use it.)

Specifically for Black Entrepreneurs: in addition to the information provided below, discover specialized assistance available in our article Black Business Resources.

Check out grants specific to your state: Many states have excellent programs to encourage and support new businesses. Do an internet search for your state and if you live in California, New York, Texas or Florida check out our helpful articles about grants in your state.

Consider Pre-Selling Your Product: This option doesn't occur to a lot of people – and it might not fit your product or service. But if it does, it's a great way to fund your business! If you can get some exposure and promote your product to your target audience, taking orders can bring in cash you can then use to help fund inventory. It can be a tricky balancing act but is worth the effort.

Credit Cards While they can be hazardous (because of potential high-interest rate debt buildup) credit cards are an exceptionally convenient way to finance a new business. You’ll need to have a well thought out plan and stick to it. Keep your costs as low as possible by not over-anticipating customer demand. Find a credit card that has great rewards and even gives you a long introductory period with a zero percent interest rate. If you can pay off your balance every month you could never pay any interest at all — and get some great rewards. Stay tuned for details on some of the best cards to consider!

How About Angel Investors?: If you’re really serious about this and have the ability to make it happen you should consider finding “angel investors” in your area. These are people with a high net worth (i.e., they’ve already made a lot of money), and they’re interested in supporting others. They do this not only to encourage entrepreneurship and innovation, but also to make a profitable investment. You might be intimidated and think you need a lot of high-powered connections to find them. But, as with many other things, there’s an app for that! Or at least a website and a platform. It’s called Gust and it’s for both entrepreneurs and investors - to the tune of more than $1.8 billion invested in start-ups so far. As someone who is starting a business you sign up and create your profile so accredited investors can find you. The site also provides training in the form of a blog and a video library that can help you fill out the information in a professional way that can make you stand out to potential investors.

Update May 2019

Be careful when you are making your initial agreements with startup investors. It can be tempting to go with the simplest agreements and structure, but according to a recent article in the Wall Street Journal experts have found that this early simplicity can come back to bite you later — maybe when your company most needs its financial resources.It may be difficult to take the time to jump through all the hoops necessary for solid funding, but not jumping through those hoops could make things even more difficult at a time when you most need smooth sailing. This experts advice? Take the time to speak with people who have been through deals that seemed delightfully simple at the start and then turned out to a real hornets’ nest. And take the time to set up a solid foundation early on.

Try the Thrust Fund Approach? An “online marketplace” called the Thrust Fund was put together to help entrepreneurs get funding from people willing to invest some pretty substantial funds in return for a promise of a specific percent of a the entrepreneurs future earnings. Pretty risky, huh? Some folks were actually successful getting funding this way though all parties realized that it was not yet a legally recognized way to get funding and they would have to work out their own payment plans. We were unsuccessful trying to find a current website for the Thrust Fund and suspect that perhaps the idea did not fly. But it may give you some ideas for negotiating with friends or other potential investors if you're willing to sacrifice some future earnings in return for immediate investment capital.

See our article about Small Business Loans . It will give you an overview of what's available. It will also point you to creative new options that go beyond traditional bank loans!

Check out the SBA website: Though the Small Business Administration does not make direct loans, they do provide backing for some loans to banks in order to increase the ability and inclination of banks to loan to new and small businesses. So don’t ignore them when you consider how to fund your business. In addition to helping you that way they also offer step by step guides to open a new business. In fact sometimes their blog gives steps specific to a particular type of business. Recently they highlighted Fitness Centers and how to go about opening one. They recognize that fitness is a big opportunity area these days — a market segment that generated more than $24 billion in Industry Revenue in the United States in 2014. So it might be something to consider. At any rate, it’s worth checking out the SBA and looking at their blog subjects to see if something is particularly pertinent to you. Their website offers a wealth of information and resources, and you can enter your zip code to immediately home in on help available in your geographic area. Discover more in our guide to the SBA website.

Seek a SBA 7(a) loan: The Small Business Administration’s 7(a) program is specifically for startups with less than $2 million in sales and no real estate involved. They typically offer financing for a longer period of time than other loans and also can offer access to additional funds via a line of credit. Rates depend on the Prime Rate as reported in the Wall Street Journal. Find out more, including lists of approved lenders in specific counties, on the SBA website (see above).

Notes on the Small Business Jobs Act of 2010: The Small Business Lending Fund (SBLF), a part of this act, was intended to stimulate more community bank lending to small businesses. There has been considerable controversy and debate about the alleged success of this fund, and clearly the original intent of Congress was watered down considerably by the Treasury Dept. The result was that more than half the banks that applied for funds were rejected despite strong qualifications. However, banks that did receive the funds have increased their loans to small businesses to a greater extent than those banks which did not participate. It’s all quite confusing but the bottom line for loan seekers is that there are community banks out there which have an extra incentive to make loans to small business. You can locate specific lenders on a very useful qualified lenders map provided on the U.S. Treasury Dept. website.

Think Franchising might be right for you? If so you can take advantage of the franchisor’s track record and reputation, as banks are more likely to make loans to a venture they have some experience with and hard facts about. If you think investing in a franchise might be a good route for you, research franchise operations in the area where you live or want to live. Do a search to identify the franchises that are growing the fastest and offer the most promise. Go to their web sites and find out how much capital you need to open a particular franchise – the amounts vary dramatically! Important: do some homework and find out how banks rank franchises of interest. Banks give franchises a rating of A,B,C or D – the higher the grade, the easier it will be to get a bank loan with a smaller down payment, fewer forms to fill out and a quicker time to close on your loan.

For a creative approach that reviews and avoids some of the disadvantages of franchising, definitely take a look at Small Business Ideas.

State and City-Specific Resources: Many state and local entities are getting creative – and generous – trying to support small business and attract more to their area. Availability of special programs and incentives will vary from place to place, but you can do a basic internet search with the name of your state, county or city and terms like “small business programs” or “business incentives.” An example is a program running in St. Louis – if you live there, or if you are willing to move there, you should definitely check it out. In 2012 an independent non-profit called archgrants.org gave out grants in the amount of $50,000 to 15 companies — and in 2013 they hope to increase that number to 30 awards of $50,000 each! They require that your headquarter office be located in downtown St. Louis or be willing to move there. Eligible businesses should also be pursuing a totally new (and what they call “disruptive”) idea, and one that will be able to expand to address a national and/or international marketplace. Winners also have a chance at a follow-on grant in the amount of $100,000.

Family and Friends: Entrepreneurs often turn first to family and friends as a likely and friendly source of financing. This is a natural option and certainly one you might want to pursue. If you do so, be sure your agreement is carefully and specifically spelled out – don’t treat it casually with just a conversation and a handshake. It’s important to set expectations realistically, and critical that investors understand that their money is totally at risk. While it’s more fun to talk about the upside, to protect your relationship they must understand that their investment could be lost.