Once you decide to launch your own business, there is the inevitable question that you’ll need to ask yourself: How do I finance my business? Most business financial planning for a small company includes a combination of founder savings and carefully calculated debt. Experts in small business financial advice offer up the following sources as the most common ways to fund your initial stages, with varying degrees of risk in the mix.
Self-financing, friends and family
Many business owners have been putting away a little here and there over the years, anticipating that they will be needing seed money to make their entrepreneurial dreams come true. When the time comes, it might be tempting to use all of your savings to jump-start your business, but consider taking the lower-risk path of using some of your savings, and borrowing against the rest of your savings.
You can also look into penalty-free ways to borrow from any 401K savings you have accumulated. Borrowing from friends and family is also an option, but remember that your personal relationships matter as much in life as your income. Make a payment plan with each person, and stick to the schedule faithfully.
Nontraditional sources of financing
Crowdfunding has gained recent popularity, where an online appeal for early investors raises startup cash through a high volume of small, individual loans or grants. The catch: the most successful crowdfunding projects happen when an individual or brand already has a “crowd” of fans excited to be a part of the action — it’s difficult to motivate strangers to get excited about your business. But there are other avenues as well, such as taking advantage of local business startup support, which may connect you with angel investors or venture capitalists looking to get in early at a high-potential business like yours.
Once you have acquired a credit card with a generous limit, these accounts give you a high degree of flexibility; just be aware of how you will manage the costs of potentially high interest rates. Also, consider that the debt you carry on credit cards can impact your personal credit rating.
You can also take steps to protect your personal assets by forming a limited liability company (LLC), corporation, or other entity. Learn more about choosing a business structure.
Crafting a combination of financing options to get your business up and running may be the best approach, as each option creates a different opportunity for your company. You can also manage your debt by limiting your initial monies to just enough to achieve a certain level of growth, and then re-asses your loan situation. The most important thing: finding the right balance between enough money for a successful launch, without over-extending your monthly payments, keeping the focus on growth and opportunity vs. costs and limitations.