Starting a business is one of the things you can do to increase your income. However, getting the money to take this action requires proper planning. If you are thinking of starting a business, I know you are wondering, what is the best way to raise money for a business?
Like other entrepreneurs who have started their businesses, the issue or topic of how to raise funds must have come up at some point.
In each country, people start businesses all the time. For example, according to Small Business Administration (SBA), 234,000 businesses were started in the second quarter of 2020 in America.
However, there is one common factor all these businesses needed to start up: money. Raising enough funds is critical to get your business off the ground and pave the way for longevity and future success.
11 Best Way to Raise Money for a Business
In this section, I list best ways to raise money for a business. It is important that you check the pros and cons of each idea, to decide the one you will use.
The best ways to raise money for a business include;
- Use Your Savings.
- Get a Personal Loans.
- Credit Cards.
- Bank Loan.
- Venture and Angel Investors.
- Government Programs.
- Corporate Programs.
- Crowdfunding and Crowdlending.
- Rollovers as Business Start-ups.
- Home Equity Loans.
- Family and Friends.
The above are some of the options you can use to raise money for your business.
Top Ways to Raise Money for a Business in 2021
Let us now look at each of the above ways in which you can get money for your business. You can explore them and use the one or a mix of the ones that work for you.
1. Use Your Savings
Most start-up founders use their personal savings to fund their businesses, according to Forbes.
That said, do not drain your bank account to raise funds for your business. Entrepreneurs should set aside enough living expenses to last them for a year.
This is because your start-up business is not going to be profitable for months after opening.
Smaller, service-based businesses can probably get away with three to six months of operating expenses, according to FreshBooks.
The SBA has a number of tips for saving up to start your small business, including:
- Decrease credit card debt. Call your bank to request a lower interest rate.
- Set up an automatic deduction to your savings account.
- Get rid of any services you don’t use like gym or car-sharing memberships.
- Set up a budget using a service like You Need a Budget.
- Buy used. This includes your car and any other purchases. Look for Facebook groups in your area focused on trading or selling used items.
Saving is one option of the best ways to raise money for a business.
2. Get a Personal Loan.
This tactic involves borrowing money from family and friends. To avoid hurt feelings, put the terms of the personal loan in writing.
Be clear about how much you need, what the interest rate is and when it will be repaid.
3. Credit Cards
You can either use your personal credit card or open a business credit card.
Even if this option is open to you, do not choose it lightly. Credit cards often have high interest rates that increase your balance monthly.
You could end up with a debt balance much higher than you planned for, which could cripple your new business.
Still confident credit cards are the best route for you? Make sure you’re using a card with the lowest interest rate possible and excellent repayment terms.
4. Use Bank Loans
Unfortunately, a small business bank loan is not guaranteed. Banks want airtight businesses plans and excellent credit scores before they will consider approving a small business loan.
They may also want you to invest your own money in the business to prove you are really committed to making your company work.
You can go with your personal bank since they’ll already be familiar with your banking history. Or choose a bank that’s historically known for lending to small businesses.
To improve your chances of getting a loan, choose an SBA-guaranteed lender.
5. Venture and Angel Investors
Venture capital and angel investing is best suited to high-growth companies or companies that are already profitable with good cash flow. Still, each investor has his or her own specialty in terms of region, industry and company age.
In any case, you’ll need a unique idea and a solid business plan to attract their investment. The SBA can help match you to potential private investors through their SBIC program. Investments are typically made over a three year period.
SBIC investments comes in three forms:
- Loans – SBIC loans range from $250,000 to $10 million, which must be paid back (with interest). Interest rates are 9 to 16 percent.
- Equity – SBIC will give you money for your business for a share of ownership (and control). Investments range from $100,000 to $5 million.
- Loan and Equity – A combination of the first two options. Loans come with interest rates of 10 to 14 percent and investments are $250,000 to $10 million.
6. Government Programs
Government grants can require some research to find the right one for you. Thankfully, the SBA has offices all over the United States that can coach you on available grants, plus provide business consulting and training. Grants.gov also has information on over 1,000 federal grant programs.
There are also small business grants available to entrepreneurs facing unique barriers. For example:
Women’s Business Centres offer advice on local, state and private loans for women, especially those who are economically or socially disadvantaged.
Veteran’s Outreach Business Centers help match veterans to loans.
7. Corporate Programs
Select corporations offer programs that support small businesses, including low-interest financing. For example, Goldman Sachs has a program that gives affordable loans to businesses who might not qualify at traditional credit sources.
8. Crowdfunding and Crowdlending
Crowdfunding usually involves asking large groups of people for funds on dedicated crowdfunding websites. They usually receive a gift or the product you are developing in return for their investment.
Crowdlending functions much the same way except that your funders expect you to pay them back.
Here are some options:
- Kickstarter: the most popular choice. You add project details, your funding goal and deadline. You can then email family and friends with your page link. Payments to you are made via credit card. If you reach your goal, Kickstarter takes 5 percent and Amazon (Kickstarter’s credit card partner) takes 3 to 5 percent.
- Indiegogo: an alternative to Kickstarter.
- AngelList: matches you angel investors.
- Kiva Zip: ask for small loans with zero-percent interest.
- Accion: loans usually have an 11 to 16 percent interest rate, plus additional costs.
- Rollovers as Business Startups (ROBS).
Here, you use your 401(k), Individual Retirement Account or other retirement funds to finance a business without incurring taxes or Internal Revenue Service penalties.
The account gets rolled over into a new retirement fund that, effectively, becomes a shareholder in your business.
But be careful: ROBs are complicated and if you don’t set yours up right, you could owe penalties and a big tax bill.
An article in Daily Tax Report, “Examinations of Rollovers as Business Start-Ups Arrangements: A Guide to Surviving IRS Scrutiny” might be worth reading.
- Home equity loans.
If you have substantial equity built up in your house and a credit score well above 700, this route may be a pretty good option. The funds are usually taken as a lump sum that you can pay off over time. And interest is not sky high, roughly 4.5% right now.
- Friends and family.
Your friends or members of your family is one other best way to raise money for a business.
If you are going to use this route, you should be clear about the terms and put everything in writing. This will help you avoid conflict and bad blood later on.
In conclusion, it is such a great thing for you to start a business. The odds for success are long.
Data shows that about half of new businesses survive for five years, and only a third remain in operation after 10 years.
Despite this, a small percentage mature into stable small- to mid-sized businesses, while a microscopic 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 legend or even just profitable, you need to find a way to finance its birth.
The SBA states that, the Ewing Marion Kauffmann Foundation estimated the average cost of starting a new small business in the U.S. to be about $30,000.
Frequently Asked Questions
How Can I Start My Own Business with No Money?
To start a business with no money or very little startup costs, consider these options:
1. Service-Based Business
Starting a service-based business that is run primarily over the internet is cheap to start up. Creative services like graphic design, software or app development or copywriting just require a computer and are essentially free to start up.
Other ideas include photography, fitness coaching and house cleaning, though you’ll need equipment.
This hot business idea means that you sell products that are made, stored and shipped by a third party such as Amazon.
You can set up your own low-cost online store using sites like Shopify.
You then curate the products sold and focus on marketing and excellent customers service to make your shop stand out.
You use products from third parties and customize them with unique slogans or art. T-shirts, mugs, tote bags, cell phone cases and hats are just some of the items you can customize.
5. Digital Products
Design courses or templates or produce music or graphics that can be downloaded. You can sell digital products on Shopify, as well.
How Much Does It Cost to Start a Business in United States?
It costs about $3000 or less to start a small business, according to the SBA. These businesses are usually home-based, run by one owner and have few start-up costs.
Home-based franchises cost between $1000 to $5000 to start. However, retail franchises may cost a lot more.
Entrepreneur has a starting costs calculator to help you estimate your personal start-up costs.
How Do I Qualify for a Business Loan?
To qualify for a business loan, a business owner needs the following:
- Good credit score – Get your credit score and then follow these steps if you need to improve it.
- Enough cash to cover outstanding loans – Your existing cash must cover not only debts and loans you already have but the new loan as well.
- Strong assets – You are more likely to qualify for a business loan if you have enough assets. This could be cash and accounts receivable, or money owed by your clients to cover the loan should you default.
How Can I Get a Small Business Loan without Collateral?
Loans backed by the SBA typically do not need collateral. The SBA guarantees these loans instead so even start-ups can access funding. Use this SBA tool to find lenders for your specific business.