Implementing a robust financial management plan and securing the funds you need from the right sources can make all the difference for a new startup in today’s competitive business market. Managing your finances effectively requires you to work out how much money you need, when you will need it, arrange for contingencies and be vigilant about the potential for growth and expansion. You then need to look at the financial options available and weigh up the pros and cons of each to secure the money that will best suit your short and long-term goals and objectives.
Existing assets
Home equity
You can leverage the equity in your home to get either a home equity line of credit (HELOC) or rate home equity loan (HEL) for your startup venture. You will need to have 15% equity or more in your home to do this and you can get up to 85% of its value, either as a lump sum or line of credit. A HEL is great if you need a substantial sum of money up front for important business expenses, while a HELOC may be preferable if you don’t require a large amount immediately and would rather draw on funds as and when you need them. You make payments on the full loan straight away with a HEL but only pay interest on the current balance with a HELOC. The latter is ideal for cost savings, while both offer low interest rates. The main risk with any home equity option is the possibility of losing your home if you default on the loan.
Retirement funds
A Rollover for Business Startups (ROBS) allows you to make use of any money you have saved for retirement without incurring any penalties or taxes. A ROBS is not a means to cashing out your retirement fund or taking a loan against it, as it involves buying stock with the money from a 401K and holding it in a retirement account. To be eligible, you must be a full-time employee of the startup and have an account worth at least $50,000. You can then borrow up to 100% of savings after paying a $5,000 fee up front and a $1,500 fee every year thereafter. The validity of ROBS has been debated – they are deemed questionable by the IRS as a tax avoidance transaction, as they can often benefit one individual. However, they remain a viable option for many startups, due to the relative ease of acquiring funds without the worry of debts.
Borrow
Personal loans
You will need working capital to get your business up and running, and securing a personal loan is ideal for cash flow management. Personal loans are available up to $40,000 and they don’t require any collateral. They are particularly useful if you have a great credit score and excellent personal financials, as they will be more convenient and attainable than the vast majority of options. You can use a personal loan calculator to find out how much you could apply for.
Research by the National Small Business Association shows that more than a third of small enterprises use personal and business credit cards to fund operations, and they are perhaps the most cost-effective and time-sensitive means to raising money. There is a wealth of benefits to small business credit cards too, such as cashback and rewards programs, promotional introductory rates and APRs of between 10 and 20%. Peer-to-peer sites can also match you directly with institutions and individuals that offer personal loans, so you can find a financial option that is best suited to your business.
Fundraise
Angel investors
Raising funds for a business in the digital age is often focused around networking and increasing the visibility of a brand across social sites and other online platforms. This can help to catch the eye of wealthy individuals, such as angel investors, who offer debt-free money in return for a stake in the company. These investors generally offer less than $1 million and are typically more concerned with securing equity than control. They can also provide much-needed advice and expertise in finance and other areas of business.
Venture capital
Venture capitalists are similar to angel investors but they usually expect a much greater return on their investment and are more likely to take an active role in day-to-day management to achieve their aims. The benefits of this option include the absence of interest rates, but giving up large amounts of equity and control can be a major drawback for more single-minded micro and small businesses.
Crowdfunding
Crowdfunding is an ideal financing option for unique and interesting business ideas, as it gives you an online platform to reach a large audience who can each make small investments to reach or surpass a set target value. There are two types of crowdfunding: reward based and equity based. Reward based is recommended if you have a cutting-edge tech product or new idea, as you may be able to get funds to build a product or support high-margin products by providing incentives and offers. Equity based is less popular and involves giving backers equity shares in the company in return for investment.
