5 methods for financing a small enterprise.
Starting a small business requires ambition, persistence, confidence, and money. The amount of cash needed varies depending on the nature of the business. An e-commerce store may only require a few hundred dollars, while a cafe would cost significantly more. However, these methods can help you achieve your fundraising goal.
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Small business loans
Small business loans offer a simple solution for obtaining the funds you require. Similar to other installment loans, these loans typically involve receiving a lump sum of money that is then repaid in installments over time.
A potential disadvantage of obtaining a business loan from a company is that you may not fulfill the lender's conditions, especially if you are new to business — most lenders demand that you have been in operation for at least six months and have a minimum monthly revenue of at least $15,000.
Some lenders, such as Kiva, a peer-to-peer lender, offer microloans of up to $15,000 with 0% interest. However, business owners must first crowdfund their loan from friends and family before they can access Kiva's larger network of individuals willing to contribute.
Kiva offers a 0% interest loan to entrepreneurs who meet certain criteria, including being at least 18, living in the U.S., using the loan for business purposes, and not being in foreclosure, bankruptcy, or having any liens. This makes Kiva an appealing option for those who are just starting and may not meet the revenue and business activity requirements of other lenders.
If you've been in business for a few months, you should consider Credibly, a lender that offers term loans, working capital loans, and other funding options. You can apply for as much as $600,000, and the lender considers credit scores as low as 500. However, you must have been in business for a minimum of six months and have an average monthly revenue of at least $15,000 to qualify.
Business credit cards
A business credit card allows you to borrow money repeatedly, but the high interest rate on these cards often exceeds the rate of reputable business loans, so it's best to pay off your balance in full each month.
If you're starting a business, a business credit card may be more accessible than a loan because many card issuers will consider your personal credit history when making their decision. This can be helpful if your business credit history and score are not yet established. The Capital One Spark 1% Classic is a card that is well-suited to new business owners. It has no annual fee and you can usually qualify with an average credit score or better.
The Ink Business Unlimited® Credit Card is a great option for businesses since it has no annual fee and a 12-month 0% intro APR period (after, 17.99% - 23.99% variable). This means you can make purchases for your business and have 12 months to pay it back without being charged any interest. This can be particularly appealing if you need to spend more than just a few hundred dollars to start your business and don't want to get hit with interest before you can pay back all the money.
Ensure you have a repayment plan in place before the 12-month introductory period ends before applying.
Grants
Unlike loans, grants are sums of money given by organizations without the need for repayment. Business grants are usually provided by government agencies, corporations, and nonprofits. Grants can be utilized to cover a range of expenses, including employee salaries, inventory purchases, daily operating costs, marketing, and more.
To be eligible for grant funding, recipients must meet specific criteria. Examples include:
- Woman-owned businesses
- Minority-owned businesses
- Veteran-owned businesses
- Rural businesses or businesses in economically disadvantaged communities
- Businesses in certain industries like agriculture, technology or education
Grant funding can range from a few hundred dollars to hundreds of thousands of dollars.
Your business won't have to worry about accumulating debt before its doors open because grant money doesn't need to be repaid.
To be considered for a grant, you must submit an application and any necessary supporting materials. However, some grant processes can take a long time, and it may take months to receive an update on your application. Additionally, some private organizations only award a limited number of grants each year, so there's no guarantee that you will receive one even if you meet all the qualifications.
Here are some of the more popular, well-known grants for small businesses:
Bootstrapping
One of the simplest ways to fund your business is through bootstrapping, which involves using your own money, such as personal savings or income from your primary job, to get operations started. However, it's important to note that you must have enough personal wealth to make it work.
An e-commerce business with low startup costs is the ideal candidate for bootstrapping, while businesses that require machinery, office space, or multiple employees from the outset are not as suitable. If you're saving for a small business, consider putting your funds in a high-yield savings account to earn more interest than a traditional account. Although you may not earn hundreds or thousands of dollars in interest, the additional earnings can still help you reach your goal faster.
The Synchrony Bank High Yield Savings Account offers a high APY without a minimum balance requirement or monthly fee, and provides an ATM card for added convenience.
Capital One 360 Performance Savings™ account is another strong option for those looking for a savings account without a minimum balance requirement or monthly fee. It also offers a checking account with ATM card access. This could be a good choice if you want a brick-and-mortar bank with thousands of physical branches across the U.S.
Crowdfunding
Raising small amounts of money from a large pool of people is the essence of crowdfunding. You set a total fundraising goal and the small contributions accumulate to help you achieve it. These fundraising campaigns usually come with a deadline (often a few months), after which you must return any funds collected if you do not meet your goal.
Equity crowdfunding and rewards-based crowdfunding are two common forms of crowdfunding. In equity crowdfunding, individuals invest money in a business in exchange for the potential to own a small percentage of the company in the future. This funding method is often used by startups that aim to grow rapidly and eventually secure venture capital funding. However, most small businesses that aim to be self-sustaining do not choose equity crowdfunding.
In contrast to equity-based crowdfunding, rewards-based crowdfunding involves a business offering contributors a perk, such as branded merchandise or a special free offer, in exchange for their financial support.
Kickstarter and Indiegogo are two widely used crowdfunding platforms that charge a 5% fee on successful campaigns, but do not charge a fee if the fundraising goal is not met. Additionally, both platforms may charge a payment processing fee for every contribution made to the campaign.
When starting a crowdfunding campaign, be aware that there are fees that will be deducted from your total fundraised amount.
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