4 Ways to Fund Your Start-Up

Financing Your Start-Up Business

One of the first things that prospective entrepreneurs must consider when starting a new business is funding. Without the right amount of start-up capital, growing your business can be much more complicated and cumbersome than necessary.

There are many effective ways to secure the right amount of money to start your business. Here are a few ways in which entrepreneurs can get the funding that they need for their business endeavors.

Savings and Investments

Savings is probably one of the most common ways that new business owners finance their start-ups. This is one of the simplest ways that the average business owner can accumulate venture capital. It doesn’t require approval from a third party and the ability to save is completely within the entrepreneur’s control. It may take longer to save enough cash to start your business but the benefit is that you will not owe or be obligated to anyone in the long run.

If you decide to save for your start-up, it is best to place your money in a high yield savings account. These types of accounts can offer annual yield rates (AYR) of up to 2% compared to the average 0.09% AYR offered by regular savings accounts. This means that you could potentially grow your money up to 9 times faster in a high yield savings account.

Investing in the stock market is another viable, loan-free way of accruing venture capital. Gains from dividends can add up a lot quicker than savings, yet this method is also riskier than stashing money in a savings account. Though, there are less riskier investment options like certificates of deposit, bonds, and bond funds – these methods yield low and slow returns.

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On the other hand riskier options like individual stocks, exchange-traded funds (ETF’s), and index funds can yield higher and quicker returns. However, with these options there is a higher likelihood of losing some or all of your investment. But if you invest wisely the gains usually outweigh the losses.

Grant Opportunities

Grants are great ways to fund your business. Government and private organizations, agencies, and institutes offer a number of grant opportunities on an ongoing basis throughout the year. Most grants have specific eligibility criteria and defined deadlines for submission. However, if you meet the qualifications and deadline requirements you can possibly secure a grant to finance part or all of your start-up costs and future expenses.

The major benefit in receiving grant money is that it is free. There is no requirement to pay back grant funds. Another benefit about receiving certain grants is that they can enhance your company’s reputation and credibility and increase your visibility. Additionally, individuals in certain minority groups or protected classes such as women, and Native, Hispanic, and Black Americans, and veterans can qualify for specific grant opportunities geared toward underrepresented groups in the entrepreneur space.

Some of the disadvantages about applying for grants is that the process can be long and tedious. Usually grant applications require surmountable time and effort that can be prohibitive to new entrepreneurs who are focused on their business operations. In addition to this element, grants are very competitive. There are often many applicants vying for the same grant opportunity which makes them a less dependable financial resource.

Also, grants tend to come with specific stipulations. Grant recipients have to spend funds according to the rules or guidelines of the grant issuer. You cannot use grant funds in any way you choose. Though there are a few disadvantages to grant funding, there are a number of inherent benefits that make grants worthwhile sources of start-up capital.

Crowdfunding

Crowdfunding is another beneficial tool for securing start-up capital. This funding option requires you to solicit prospective investors or donors to finance your business or project. There are a few common crowdfunding models available to business owners which include the following:

  • Investment-Based: Individuals, groups, or organizations invest in your business in return for future dividend payouts.
  • Loan-Based: Individuals, groups, or organizations lend you interest-bearing loans.
  • Donor-Based: Individuals, groups, or organizations give you money with or without the expectation of something in return.
  • Reward-Based: Individuals, groups, or organizations give you money in return for a finished product or defined service linked to your business.

Depending on the model you choose and your ability to secure sound investments, crowdfunding can be a very useful financial tool for your business. You can raise all or most of your venture capital and long-term buy-in from investors. This is also a great way to promote your products or services to future customers.

However, there are also a few disadvantages to this method. If you set up an investment-based model you are essentially selling part of your business. If you use the loan-based crowdfunding model you will have to pay back the money you receive and oftentimes with interest. Once you choose the reward-based model you are entering into a quid-pro-quo relationship, which puts more pressure on you to deliver. If you elect the donor-based model you may receive less funding.

Additionally, you may have to pay subscription, platform, processor, or other fees when using popular crowdfunding platforms. If you set up your own website, you may have to pay money for hosting and/or promoting your website. Additionally, your reputation is as stake when you crowdfund. You have a lot more pressure to deliver on a product or service if you choose this funding option.

Monster

Borrowed Money

One of the more common ways of start-up funding is through borrowed money. This may be in the form of a business loan, credit card, or line of credit. You can borrow money from a number of sources including family, friends, and banks and other financial institutes. Borrowed money generally requires you to repay funds on a monthly basis with interest.

The benefit of borrowing money is that it is generally a straightforward process that usually takes a matter of hours to a few days. If you have good to excellent credit it is fairly easy to get approved for credit cards. And if you have stellar credit and decent sources of collateral it is fairly easy to get a business loan or line of credit.

On the other hand, it is generally difficult for new business owners to get loans from financial institutions because they don’t have an established credit history. Also, business loans bear interest. This means that you will repay more than the amount that you borrowed. Credit cards are a little better in this regard because you only pay interest on balances that you carry from month to month. Repayment of loans, credit card, and line of credit debt usually begins within 30-60 days after you borrow the funds.

These terms and conditions can add to a new business owner’s stress level. Repaying money when you have little to no business cash flow can result in anxiety. This can subsequently adversely impact the performance of your business. You may end up cutting corners, compromising your integrity, selling yourself short, overextending yourself, etc. trying to pay back money that you don’t have.

So I always recommend borrowing money as a last resort for new business owners. This includes money borrowed from family or friends. Because even if not repaying such loans has no bearing on your credit score, this can adversely impact your personal relationships and possibly your reputation.

Need more business coaching ideas? Contact us so that we can help you along your journey.

Updated Paycheck Protection Program Lenders and Interest Rates

Paycheck Protection Program

The Department of Treasury has made amendments to the Paycheck Protection Program created under the CARES Act. Here’s what you need to know:

As of midnight April 3, 2020 small business owners were eligible to apply for the Paycheck Protection Program (PPP) that I discussed in my last post. Starting April 10, 2020 independent contractors and sole proprietors can begin submitting applications for the PPP.

Approved Lenders

The list of approved lenders has been expanded to include:

  • Small business administration (SBA) lenders
  • Any federally insured depository institution
  • Participating federally insured credit unions
  • Participating Farm Credit System institutions
  • Other regulated lenders who apply for approval

Interest Rates

The original CARES Act indicated that loan interest rates can not be more than 4%. A fixed interest rate of .5% was later established for the program. On April 2, 2020 the fixed interest rate was increased to 1% after smaller lending institutions had further discussions with the federal government. While there has been a slight increase in the fixed interest rate, it is still much lower than initially proposed upper limits of 4%. Thus, this is still a great program for small businesses who are suffering economic hardships during the COVID-19 pandemic.

We will keep you updated as more changes are implemented within the Paycheck Protection Program.

How the Paycheck Protection Program Can Stimulate Your Small Business

CARE's Act Paycheck Protection Program

Though COVID-19 has turned our world upside down, there is still an upside to the situation. While we have experienced major shifts in how we work and many are out of work, there is relief in sight for some who may be on the verge of economic hardship. As of March 27, 2020 the federal government implemented the Coronavirus Aid, Relief, and Economic Security (CARES) Act that has been designed to provide financial assistance to individuals, families, healthcare entities, educational entities, non-profit organizations, small businesses, and the like.

In this post, I am going to focus on the parts of the act that specifically apply to the Paycheck Protection Program that was implemented to stimulate small businesses and a number of other individuals and entities that employee 500 or fewer employees at one physical location including:

  • Sole proprietors
  • Independent contractors
  • Self-employed individuals
  • Nonprofit organizations
  • Veterans organizations
  • Tribal businesses

These businesses and entities are eligible to receive covered loans as long as they were in operation during the covered period between February 15, 2020 and June 30, 2020. This ultimately means that the business, individual, or entity must have been in operation by February 15, 2020 and must continue to operate based on the provisions of the covered loan through June 30, 2020. Certain loans that were acquired on or after January 31, 2020 may be refinanced under the Paycheck Protection Program and receive the covered benefits.

Loan Coverage

Loans covered under this program are meant to ensure that these businesses, individuals, or entities are able to meet payroll demands throughout COVID-19 quarantine and business activity suspension periods. The loan was created to ensure that businesses are able to cover salaries, wages, commissions, and tips. It also covers vacation, maternal and paternal, family, medical, and sick leave pay and separation allowances. Additionally, employers can use the loans to cover group health benefits, insurance premiums, and retirement benefits.

Each of these payroll costs extend to all employees as long as an individual employee’s salary doesn’t exceed $100,000 annually. Also, only U.S. based employees may be compensated under the stipulations of the loan. In addition to payroll costs, the loan may also be used to cover costs related to:

  • Mortgage payments
  • Rent payments
  • Utilities
  • Interest on debt obligations

Loan Stipulations

The benefit of these covered loans is that they are readily available to small businesses. Typical small business administration (SBA) loan requirements such as personal guarantee or collateral, fees, and the inability to procure other small business loans do not apply.

A personal guarantee requires a business owner or executive to guarantee that their personal assets may be used to pay loan debt in the event that the business is unable to do so. Collateral loans require the borrower to guarantee valuable assets such as property, equipment, inventory, future earnings, etc. to secure a loan. Personal guarantees and collateral are standard measures used to secure small business loans, especially for new businesses or for business owners who have less-than-stellar credit. Neither of these measures are necessary to qualify for Paycheck Protection Program loans under the CARES Act.

Participating lenders cannot charge loan application, origination, guaranty, monthly administration, annual, or other fees that are usually incurred when procuring a small business loan. Additionally, SBA loans often come with the stipulation that borrowers must not be able to procure other types of business loans in order to qualify for a SBA loan. This requirement has also been removed from the Paycheck Protection Program eligibility criteria.

Loans made under this program have a maximum maturity of 10 years from the date of the loan application. Loan interest rates are guaranteed to be 4% or less. Impacted borrowers may also have their loan payments deferred for 6-12 months.

Loan Forgiveness

Impacted borrowers may only apply for this program under one lender. They can only receive the benefits of covered loans once. In order for the loan to be forgiven in full or part, the borrower must acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Borrowers must likewise ensure that loan funds are used for these purposes.

How to Apply for the Program

Small business owners who wish to avail the benefits of this program should apply for it directly through an SBA-approved lender. There are about 1,800 SBA lenders so chances are your current financial institution is on the list. At this time, the SBA has not published a comprehensive list of lenders but are encouraging small business owners to contact their financial institutions directly to determine if the institution is a qualifying lender.

Prospective borrowers are encouraged to begin the application process by completing the Paycheck Protection Program Application available through the U.S. Department of Treasury. This form will assist borrowers with gathering the information that they need to apply through their financial institutions.

Many lenders are currently in the process of developing internal policies, procedures, and processes for this program. The SBA indicates that lenders may begin processing applications as early as April 3, 2020. A number of lenders are set to present information about the roll-out of their programs in the coming days.

Need help preparing for COVID-19 loan, grant, and other financial assistance applications? Contact us so that we can help you navigate through the process.