You are in college and have a great business idea in mind. How do you get the money for startup costs when everything else you have is going toward tuition? Understand your funding options before you give up on that great idea.
Savings and Annuities
First, look at any cash you just have sitting around. A savings account, matured bonds, life insurance policies or an annuity could be sources of startup capital. You could cash in the bonds and insurance polices and sell the annuity, to get a lump sum of cash to work with, read more about the process at www.annuity.org/process. You may want to hold on to some of these for future emergencies and look at ways to take on some debt to fund your business.
This is your typical bank loan. Most people think of this as simply, “The bank gives me money and I pay them back with interest.” In business, the benefit of debt funding is that you don’t have to give up any of your business to get the funding, according to the National Federation of Independent Business.
Bank loans can be short- or long-term. The interest you pay on the loan is tax deductible. The principle and interest on the loan are both known figures, which makes budgeting much easier. The bank has no say in how you run your business.
You do have to pay the loan back in a fixed period. If you have any financial challenges and can’t pay the loan, it could hurt your credit and future business loans. If you’ve borrowed too much money, you could be seen as “high-risk” by other investors. When managed right, debt funding will help your business. But if not managed properly, it will most certainly hurt future opportunities.
If you can’t afford to take on more debt, equity funding could help. Angel investors or venture capitalists don’t want a monthly payment. They want a portion of your profit. They know you won’t have a profit in the beginning. They tend to look at how a business will perform over a long period.
If the business does do well, you may end up paying investors more than you would have on a bank loan. You may have to give up a percentage of the ownership of your business. It could be as much as 60 percent. You will then have to take direction from the investor on how to run your business.
Credit Card Financing
A National Small Business Association survey discovered that more than 30 percent of small businesses used credit cards to fund some part of their operations in the past 12 months. From payroll to operating expenses, credit cards are being used to provide short-term loans to the small business owner. Especially useful are cards that offer no interest if paid in 30 days and perks such as flyer miles. You will have access to interest-free money and gain other money-saving benefits.
Small businesses are seeing credit cards as a faster way to get funding, says a Business Week report. But credit card companies can be harder to work with if you have problems paying off the balance. They will be the first to put damaging information on your credit report. Weigh the pros and cons before relying too much on credit cards to start your new business.