It can be incredibly difficult to fund a startup. It costs a lot of money to start a business, and you have to find someone, a lender, an investor, anyone who believes in the endeavor as much as you do and is willing to take a chance.
Some Types of Funding Work Better for Startups than Others
The fact is, traditional lenders, and even private lenders, do not always work that great for funding startups. Most require at least one year, more often three years or more, of business tax returns for a business startup loan. So, where does one find funding for startups? Here are some options that almost any startup can get.
When it comes to funding for startups, the credit line hybrid typically offers the most money. It allows you to fund your business with no collateral and typically very low interest rates. No financials are required. Furthermore, it reports to the business CRAs. As a result, you build business credit. This will get you access to even more money without a personal guarantee.
You can usually get a loan up to $150,000. This is probably the highest amount of financing you’ll see for a startup from one source. It is easily more than what you could get on your own when applying for cards. You can get cash out on this program as well.
There is no impact on your personal credit with this type of financing. You need a 680+ credit score, or a credit partner with good credit to get an approval.
Startup Business Loans: Unsecured Credit Cards with Good Personal Credit
You can definitely get funding for startups from credit cards if you have good personal credit. Just be aware that since you are relying on the merits of your personal credit, these cards can affect your personal credit score. You may also need several of these cards, as personal cards tend to have lower limits and business expenses are often huge.
Startup Business Loans: Unsecured Credit Cards with Good Business Credit
These are credit cards that you get in the name of your business. You use your business name, contact information, and EIN vs. your personal SSN. They will report to the business CRAs. It’ll take 6 months to build a credit profile before you can apply for these types of cards. They do not use personal credit for pre-qualification.
Startup Business Loans: Use a Guarantor
Here’s another option if you do not have or want to use assets as security for a loan. Ask a friend or family member who has these kinds of assets. They may let you leverage their asset in exchange for a percent of your business. They usually want less of a percent of your company than a venture capitalist would.
Startup Business Loans: Collateral-Based Loans
If you are looking for a pure business startup loan, collateral-based loans are going to be your best bet. Use your assets as collateral. Rates are lower, and your personal credit doesn’t have as much of an impact. Here are a few options.
You can also use your existing stocks as leverage to get business financing. Borrow as much as 90% of their value. You continue to earn interest on the stocks you pledged as collateral, and generally closing and funding happens pretty quickly.
Your existing 401(k) or IRA can help fund your business as well. The funds work as collateral for business financing. This program uses IRS proven strategies. You will pay no tax penalties, and you still earn interest on your 401(k). Rates are low, and this option usually has a quick closing and funding process as well.
Accounts Receivable Financing
Additionally, you can use your outstanding account receivables to get startup business loans. Get as much as 80% of receivables advanced in less than 24 hours. You get the rest of the accounts receivable amount once the invoice is paid in full. Closing takes 2 weeks or less.
Receivables should be with the government or another business. Getting financing with receivables from individuals is not as easy. If you also have purchase orders, then you can get financing to have those filled. You won’t need to use your cash flow to do so.
Consider using your existing inventory as collateral for business financing also. You’ll need inventory valued at $500,000 or more. Often, you can get approval for a line of credit for 50% of inventory value.
Inventory loans are another option. The minimum inventory loan amount is $150,000. The general loan to value is 50%. So, inventory value would have to be $300,000 or more. It’s important to note, it can’t be lumped together inventory, like office equipment.
Startup Business Loans: Equipment Financing
Get financing to buy or lease new equipment. Use your first and last month’s payments to be approved. Rates vary widely based on risk factors, but usually you can get approval with a credit score of 650 or better.
The lender will undervalue equipment by perhaps up to 50%. This is on major equipment only. Lenders won’t combine a lot of small equipment. You can get loans up to $2 million.
Equipment Sale – Leaseback
If you already own your equipment free and clear, you can use it as collateral for financing. The process involves selling the equipment to a lender for cash. You then lease it back from them. You need at least one larger piece of higher value equipment to qualify, and you can get funding in as little as 3 weeks.
Other collateral can also be used. Investors looking to buy and flip properties can get financing. They must also have cash, experience, and average credit or better. You can get financing against commercial real estate, and insurance agents can get book of business financing.
Book of Business Financing
A book of business is a list of accounts or clients. Finance and legal professionals often use this term, as do insurance agents. In an ideal situation, an insurance agent is continually adding to his or her book of business.
You can have an insurance book of business valued by a professional company. There are many companies which only conduct business valuations. These valuations help determine an appropriate sale price for a particular asset or organization. In the insurance industry, the average sale price for a book of business is often between two and four times that of the annual earnings.
You Don’t Have to Wait to Fund Your Business
Funding a startup is hard, there is no doubt about it. Startup business loans are not easy to come by either. However, there are options. You just have to find the one, or combination, that works best for you and your business.
This depends on a number of things, including which phase of start up you are in, your current credit situation, and how much funding you need. It can take time, but these options should give you a good start.