Not every aspiring entrepreneur can go on a TV show to secure funding for a business idea. From business loans to investors, there are a myriad of options to help you make it happen! Review the following options as a starting point, then loop in a CPA or legal professional for more guidance.
Where to Get Funds for Your Business Idea
Credit Unions and Banks
Because your business isn’t off the ground yet and does not have history or cash flow, the loan options available to you versus an established business may differ.
For the latter, a lender will look at your personal credit score (with a business loan, a lender will also take your business credit score into account). They will ask for additional personal and business information such as your business name, the legal structure of the business, and more.
Keep in mind any limited liability granted under your business’s legal structure will not extend to company debts associated with the card if you are the applicant.
Tip: Learn more about business structure and liability in our recent blog post Do You Know the Best Option for Structuring Your Business?
Just like a business credit card, your creditworthiness and ability to make payments are primary factors in getting approved for a personal loan.
When compared to a traditional business loan, the lending limit for a personal loan may not be as high.
Another option is called a Small Business Association (SBA) loan. The SBA acts as the guarantor on the loan – AKA the entity responsible for making payments if you default on the loan. Going this route typically requires some extra forms and the SBA has legal claim over assets if debts go unpaid.
Loans can also come in handy later on down the line.
Statistics show 82% of businesses are profitable within five years of opening, but you have to survive the first few years to get there.1 Lack of capital is the top reason businesses fail. A traditional business loan will give you the capital and time you need to bridge the gap.
Friends and Family
If a relative or friend is able, allow them to help you get your idea off the ground. Their help could prove invaluable even if their contribution doesn’t cover the total cost of what you need.
How they contribute to your business may impact ownership and introduce new partners you did not need or want. For example, if they make an equity investment you’re essentially selling them a portion of your business.
They can also loan the money to you. But beware: If the loan is interest-free, the IRS will consider it a gift and tax the lender’s contribution. Plus, it’s seen as additional income for you and must be recorded as such on tax returns.
To avoid this, a friend or family member can charge you the Applicable Federal Rate (AFR) on the loan, which changes monthly.
Mixing relationships and money can be tricky, so be sure to sit down and have a formal conversation about the situation and any expectations for repayment.
An investor is typically an individual or group who sees potential in your business and provides capital to finance it. You do not need to repay these funds, but you relinquish some control to the investor because they own a share of the business.
Finding an investor can happen in a couple of ways. One is to network within your community or industry. Check out Cincinnati’s Regional Chamber for upcoming events in your area. You never know who could be in attendance!
Another option is to look online on apps like Linkedin. There, you can virtually connect with investors in your area or who have an interest in your industry.
It’s helpful to bounce funding ideas off a financial industry professional so you can make a sound decision for your business’s future. For more information about funding your idea, register for General Electric Credit Union’s (GECU) free webinar How to Start a Small Business: Bringing Your Idea to Market.
You’ll hear from GECU business services experts and have an opportunity to ask them questions about your unique funding situation and needs.
1 “Starting a Business with a Personal Loan [3 Loan Rules].” PeerFinance101, 3 June 2020, peerfinance101.com/starting-business-with-personal-loan/#:~:text=Using%20a%20Personal%20Loan%20for%20Business%20Startup%20While,having%20a%20workable%20business%20plan%20and%20nearing%20sales.