How to Get Startup Money for Business
Are you looking for startup money for business? Starting a business can be an exhilarating experience. That is, except for the part about needing money. But your startup won’t survive for long without cash. If you’re not independently wealthy and can bootstrap your dream, what do you do?
The answer: think like a lender.
It may seem simplistic, but lenders just want two things: to make money off the loans they offer and be paid back by their borrowers. The first one is a result of their choices of loans to offer and terms. The second is in your hands.
The 3 Cs Capital Acquisition Formula
This is why lenders look at one of three things for loan approval: cashflow, collateral, or credit. The more of these “Cs” you have, the more funding options are available. For all the funding we cover in today’s post, we show you exactly what you need to have for approval.
But keep in mind, startups have it rough.
With very little time in business, they can’t prove that they’re getting steady cashflow. They just plain don’t have a big enough sample size. A short time in business is also seen as less stable, because about one-fifth of all new businesses fail in the first two years. So the first “C” is out.
But that’s okay. Because you’ve got access to two more.
Startup Money for Business: Using Collateral
Collateral is a great way to assure a lender that you’ll pay them back. And while your business might not have too much collateral yet, you probably have something you can pledge. It’s time to think outside the box.
This is not a loan. And you will not have to pay an early withdrawal fee or a tax penalty. You put the money back by contributing, like with any 401(k) program. This means you won’t lose your retirement funds. This is a 401(k) Rollover for Working Capital program. The IRS calls it a Rollover for Business Startups (ROBS).
According to the IRS, a ROBS qualified plan is a separate entity with its own set of requirements. The plan, through its company stock investments, owns the trade or business. That is, not the individual. Hence, some filing exceptions for individuals may not apply to such a plan. This type of financing isn’t a loan against, your 401(k), so there’s no interest to pay. It does not use the 401(k) or stocks as collateral. Instead, this is no more than a movement or change of custodian.
401(k) Financing: Terms and Qualifying
Low rates, often less than 5%. Your 401(k) must have more than $35,000 in it. You can usually get up to 100% of what’s “rollable” within your 401(k). The lender will want to see a copy of your two most recent 401(k) statements.
You can get 401(k) financing even with severely challenged personal credit. The 401(k) you use cannot be from a business where you are currently working. So it must be from older employment. You cannot be currently contributing to it.
Don’t have a 401(k) that would work? Then try IRA financing. It’s a lot like 401(k) financing. In as little as 3 weeks you can invest a part of your retirement funds into your business. This gives you more control over the performance of your retirement plan assets. And it gives you the working capital you need for business growth.
IRA Financing: Terms and Qualifying
In general, you will work with a CPA. They will help you roll over a non-contributing and qualifying account. This allows for cash out of half, or $50,000, whichever is lower. If applicable, a CPA you work with will structure a self-directing IRA for the remaining funds.
Do you own stocks? Some lenders will make loans using securities as collateral. Securities-based lending provides ready access to capital. You can use this capital for almost any purpose, such as buying real estate or investing in a business. The only restrictions to this kind of lending are other securities-based transactions. For example, like buying shares or repaying a margin loan..
Stocks Financing: Terms and Qualifying
You continue to earn interest on stocks you pledge as collateral. Closing and funding takes less than 3 weeks. Rates can be as low as 1.6%. But you will have challenged personal credit.
Bonds will work just as well as stocks. Securities-based lending for bonds comes from large financial institutions and private banks. People tend to seek out these kinds of loans, if they want to make a large business acquisition. Another reason is if they want to execute large transactions like real estate purchases.
Lenders determine the value of the loan from an assessment of the borrower’s investment portfolio. In some cases, the issuer of the loan may determine eligibility based on the underlying asset. It can end up approving a loan based on a portfolio of US Treasury notes rather than stocks.
Bonds Financing: Terms and Qualifying
Most investment-grade corporate, treasury, municipal, and government agency bonds are good to use. You keep all the interest and appreciation from your securities. To qualify all the lender will want is a copy of your two most recent securities statements. If your stocks or bonds have a value over $25,000, you can get approval, even with severely challenged personal credit.
No Collateral to Get Startup Money for Business? Not to Worry
If you’ve got good personal credit, we can tie a direct line from it to good business credit. The good FICO score doesn’t have to be yours; it can be a credit partner’s.
Credit Line Hybrid
A credit line hybrid is a form of unsecured funding. Our credit line hybrid has an even better interest rate than a secured loan. Get some of the highest loan amounts and credit lines for businesses. You can get 0% business credit cards with stated income. Many of these report to business CRAs. You can build business credit at the same time. This will get you access to even more cash!
Credit Line Hybrid: Terms and Qualifying
You need a good credit score or a guarantor with good credit to get an approval (a FICO score of at least 700). No financials are necessary. You can often get a loan of up to $150,000. Some cards may report on your personal credit.
Get Startup Money for Business by Building Business Credit
And keep in mind: our Credit Line Hybrid isn’t the only way to build business credit. Business credit is an asset, and lenders like to see that yours is good. But you’ve got to work at it.
Start with vendor accounts. Starting with vendor credit accounts is a proven way to start building business credit. But we don’t include vendors just because they report to the business credit reporting agencies. We include them and we talk about them because they have quality products that you can use, and fantastic customer service. They are more than a means to an end!
Starter vendors are open to working with most businesses, even startup ventures like yours! Make sure vendors report to the CRAs – not all do. Vendors report to the business CRAs within 60 days. They help you build your business credit profile and score.
Vendor Credit: Terms and Qualifying
Terms will vary depending on the vendor, but they tend to be Net 30. Some will not accept virtual offices. You will often need a D-U-N-S and an EIN at the very least. But you will not need collateral, good personal credit, or cash flow.
And continuing to grow your business credit portfolio means credit cards. Add payment experiences from at least three vendors. Once they report to business CRAs like Dun & Bradstreet, you start qualifying for store credit, and fleet credit, too. While your startup grows, so will your business credit.
Get Startup Money for Business: Takeaways
Startups have a few strikes against them when it comes to getting business financing. But you may have collateral right now, and can use it to get money. Good personal credit is another thing you can leverage. And it doesn’t even have to be your own good personal credit! And build business credit for the best chances for the most money. Contact us today for the details.