How to Fund a Business

Four Methods:Funding Your Business YourselfTaking Out a Small Business LoanAttracting InvestorsInvestigating Other Options

All businesses rely on a source for funding everyday expenses, from office supplies to inventory. Borrowing money to pay for a business comes with many risks, even if you decide to use your own funds. If you are looking to fund a business, consider the following list of suggestions when making your decision.

Method 1
Funding Your Business Yourself

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    Think about the benefits and drawbacks of funding your business yourself. These days, over 90 percent of start-ups are self-funded. This method has several advantages, including maintaining control of the business and avoiding giving up business equity. However, with this method you are putting your own assets at risk. It may also take much longer to build up enough savings to make this sort of financing a possibility.[1] Take these risks into consideration when deciding to fund your business personally.
    • This method is also referred to as "boot-strapping."
    • Having your own money in your business may give confidence to future investors.[2]
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    Consider your own money as a source for business financing. This is the simplest way to fund your business personally. Take money out of a savings account or another account that you have built up over time. You should only select this option if you have funds that exceed your retirement savings and emergency fund. You should not use any savings that you have set aside specifically to secure your future.
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    Take out a second mortgage on your home. Your home is one of your most valuable assets, so taking out a loan against its value will likely yield you a good amount of money (provided you have substantial equity in it). Check with local banks to see your options. Some may let you use a second mortgage for business purposes while others may not. Be sure that you also have adequate credit to apply for one of these loans.[3]
    • Be warned that because this loan is taken out against your home, it may result in foreclosure if you fail to repay the loan.
    • Never take out a second mortgage for personal use from the bank and then use it for your business. This is a breach of the loan agreement and constitutes fraud.[4]
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    Finance your business with an equity line of credit. If you have enough equity in your home, you should be able to borrow from it using a home equity line of credit (HELOC). Discuss your options with your bank's financial adviser and determine if this is your best option. With an equity line of credit, you benefit from the flexibility of borrowing from it whenever needed. This is different from a second mortgage, which requires regular payments and is based on a set initial amount.
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    Apply for a credit card to fund your business. A credit card will allow you to fund your business expenses, such as administrative purchases and payroll. Note, however, that even though a credit card is convenient, it also incurs high interest rates. Familiarize yourself with the terms of the card, such as annual fees, finance charges and interest rates. Opt for a credit card that offers bonus rewards that you can use for your business, such as air miles, cash back and bonus points.
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    Borrow from friends and family. Talk to people close to you and see if they are willing to invest in your business idea or give you a loan. Pitch your business to them as you would to any other investor or financial institution. Show them that you are taking the business and their loan repayment seriously. This may convince them to help you out.
    • It's best to keep the amount borrowed around the minimum of what you need and make the repayment schedule on the loan shorter than one year. This way, you can quickly move on to other sources of financing that will not risk your close personal relationships.[5]
    • Getting money from friends and family may show future professional investors that others believe in your idea. This can give them confidence in your business.[6]
    • There are many risks involved with this type of funding. For example, in the event that your business fails, you will be stuck with a debt that you may not be able to pay back and will therefore not be able to pay back your friend or family member. This could break any close ties you have.
    • If you do decide to go ahead and borrow from a family member or friend, create a contract that is formal and just as legitimate as borrowing from a bank. Hire a lawyer to draft and review the contract to avoid future legal difficulties.

Method 2
Taking Out a Small Business Loan

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    Opt for a traditional bank loan for your business. Create a business plan that encompasses your business goals and how you plan on meeting your objectives. You will need to submit a business plan in order to justify your business and get a loan. When you've done this, contact local banks in your area and try to apply for a small business loan. This may be difficult if your business has just been started and has no cash flows or assets to use as security.[7]
    • A community bank may be more likely to give you a business loan. Investigate these banks before turning to a big, national one.[8]
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    Think about getting a microloan for your small business. Microloans are loans made for smaller amounts than most traditional loans. For example, the Small Business Administration offers microloans that are for about $13,000 on average.[9] There are specific requirements that your business needs to meet in order to qualify for a microloan. For example, your loan has to be below a certain amount and borrowers must not qualify for a conventional business loan. Research the details of a microloan for the most current requirements.
    • Microloans may be reserved for nonprofit organizations. Check with the institution providing the microloan to see if you quality.[10]
    • These loans may be easier to obtain if you are founding your business outside of the United States in a developing nation.[11]
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    Learn about government business loans. Oftentimes, the government, particularly the Small Business Administration (SBA), allocates funds specifically for new small businesses. Find out if your business qualifies. You will probably have to submit a business plan for this option to determine whether your business idea is worthy of a government loan.
    • SBA loans often come with favorable interest rates when compared to other sources of funding. Typical working-capital loans charge between 5.5 and 8 percent.[12]
    • Contact your local SBA branch to inquire about these loans or go to
    • SBA loans may not require the same levels of credit and secured assets as traditional bank loans, making them easier for some borrowers to obtain.[13]
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    Look for small business grants. Federal and state governments often provides grants to various types of small businesses. This is especially true of those business involved in social causes, like medicine and education. Other governments offer grants to businesses developing beneficial new technologies. Grants are free to apply for and obtain, and don't cost your business anything. Check to see if your business qualifies for any of these grants.[14]
    • There may be additional loans or grants available from economic development programs in your area.[15]

Method 3
Attracting Investors

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    Seek out investor contacts. An investor in your company will be a person or organization with money to spare that expects a return on their investment (usually by taking partial ownership of your company). Start by talking to local business owners and friends that may be able to introduce or recommend you to an investor. Look out for high net-worth individuals who have a passion or business similar to yours and try to get introduced to them. If your business is already up and running well, you may also be able to seek the help of a venture capital firm.[16]
    • The success of such an agreement usually depends on your connection to the investor (who introduces you) and how well you are able to pitch your company's current and future successes.
    • There are online platforms, like Gust, that can connect you potential investors.[17]
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    Negotiate equity agreements. Make sure that your investor will be a good partner as your business continues to grow. A good venture capital firm or investor will be able to provide you with advice and industry contacts. In addition, these investors will own a piece of your company, forcing you to sometimes act in their interest. Look over the details of any investment agreement before signing and make sure they are not taking too much equity for what they are paying.[18] Controlling interest (over 50% of the company) means that the investor will be able to make all important decisions, regardless of what you think should be done.
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    Look into third-party loan guarantees. This type of funding is similar to gaining a private investor, but the money given to the business is from a financial institution. A third-party, like a high-net worth investor, acts as a cosigner on a loan made to the business in exchange for equity in the business. The business gets money to fund growth and development and the investor gets free equity. Should the business fail, however, the investor is liable for the loan balance.[19]
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    Consider start-up accelerators or incubators. These organizations provide support to startups, usually in exchange for equity in the company. Accelerators and incubators are often tied to universities, communities, or large companies, but there may be other accelerators that exist in your area. From these organizations, you may be able to get office space, consulting, and even startup capital.[20] Find accelerators/incubators in your area by searching online.

Method 4
Investigating Other Options

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    Consider crowdfunding. If you have a well-defined product but no way to finance that product, consider using a site like Kickstarter to crowd fund your idea. This allows customers to pre-order your product well in advance, giving you the money to make that product a reality. You can also offer other goodies, like t-shirts and magnets, to smaller donors who don't pay for a full product.[21] Visit Kickstarter or another crowdfunding website to make and account and post your idea.
    • In order to be successful, you'll have to sell your idea on your Kickstarter page. This involves creating an engaging and well-made video and writing out things like your development process, goals, and facts about your team. Make sure to keep your backers updated throughout the production creation process.
    • Other crowdfunding websites include Indiegogo, RocketHub, Fundly, and Fundable. Investigate these websites and determine which is best for your business's needs.[22]
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    Research online financing sites. Private lending is becoming more common through online platforms. These sites, like Prosper and Lending Club, offer loans of various sizes. However, the interest rates charged reflect the risks being taken by the lenders and tend to be rather high. Investigate these sites online and research your options. Always read the fine print of any loan agreement and be sure of the charges before signing.[23]
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    Contact vendors about vendor financing. If yours is a product-based business and you have been running for a while, consider vendor financing to meet your short-term funding needs. All this means is that you call your product or production-input vendors and request more flexible repayment of your bills. For example, you may need 45 days instead of the standard 30 days to repay these vendors.
    • This strategy relies on negotiation and may not be available from your vendors.[24]
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    Search for small business contests. Another option for some small business is to enter in small business contests. These often allow business owners to pitch their ideas to a panel of judges in order to win startup financing. Contests vary widely and may not be applicable to your industry or specific business. Search for small business contests online to see if you quality for any of them.[25]

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