Every year, hundreds of thousands of Americans launch their own work. According to the U.S. Small Business Administration, in 2010, there were 27.9 million small businesses in the U.S. The Bulk of these – more than 75% – were identified by the government as “non-employer” businesses, meaning that the owner is the only person working at the business.
The odds of progress are long. Only about half of new work survives for five years, and only a third remain in operation after 10 years. Against this, a small percentage mature into stable small- to mid-sized businesses, while an atomic fraction becomes the stuff of legends – like Apple or Hewlett-Packard, companies born in garages that ultimately ascended to the highest ranks of American business. Before your business can have any hope of becoming a fable (or even just profitable), you need to find a way to finance its birth. The SBA states that in 2009, the Ewing Marion Kauffmann Foundation estimated the average cost of starting a new small business in the U.S. to be about $30,000. To estimate what it will cost to launch your business, check out an online startup cost calculator, such as the one provided by Entrepreneur.com. While the number may seem shockingly high, today’s entrepreneurs have a wide range of options when it comes to financing startups.
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Every small business holder knows that financing can be together one of the most important and most difficult challenges a company faces. There’s association capital, there are funds to stream you through the lean years, there’s money needed to expand your scope. We’ll break down your options for financing a business, and walk through the process of acquiring funds.
1. Small business loans
If you need an important amount of capital to fund your business, a small business loan can provide hundreds of thousands of dollars at an almost low-interest rate. You might find yourself financing money you don’t need, but all things considered, a small business loan is one of the less expensive ways to secure funding. If you go this route, consider a credit union or community lender instead of a big, nationwide bank. The former group approves around 50% of applications, while the latter approves just 17%.
2. Crowdfunding platforms
Kickstarter, Indiegogo and the like offer a way to go directly to the masses and solicit funding. You’ve probably heard how they work: you make your pitch and post it on the platform, and people can contribute toward your fundraising goal. In some cases, you can keep the money you raise even if you don’t make your goal; with others, it’s all or nothing. The downside of these platforms is that the transaction cost can be quite steep, ranging from 5-10% of the amount raised.
3. Advance orders
If you have a clear value invitation and already have customers stuffed up, consider establishing money through advance orders. This not only provides you with working central, but it also serves to approve your business idea in a way that no amount of market research can.
4. Personal assets and savings
The simplest form of financing to acquire is your pre-current money – your investor point is pretty easy. You can also low the interest rates on your loan by gift up to your home or car as ancillary. But there are significant risks to cashing in your 401(k), taking out a personally guaranteed loan, or using your emergency funds.
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Think of it this way. Typically, when you work for someone else, your money is varied. You have some money in potentially high-risk investments, you have some (promised) money in your job, you might have assured health care benefits that will continue for a while if you lose your job, you have wealth in your house, and you have risk-free money in deposit accounts. If you cash in your contribution and savings, your income current are fully dependent on your business doing well. That’s hardly a diversified portfolio and one that exposes you to significant risk.
