Dreaming of starting your own business?  Maybe you own a cash-strapped start-up that needs a little extra in the tills to tide it over until profitability.  Either way, we all know money doesn’t grow on trees.  So what do you do to find the funds for your business without putting you and it in debt for decades to come?

For many years grants, mostly government ones, used to be one of the primary ways small business start-ups found the funds they needed to get off the ground.  In fact, a whole industry popped up teaching start-ups how to apply for and get grants to pad the coffers.  Unfortunately, while it’s still possible to get your hands on a public or private grant, it’s not all that likely.  Instead, entrepreneurs have to get a little creative when it comes to financing their dream.

1. Dig In Your Own Pockets

According to a survey done by the U.S. Census Bureau in 2012, over 60% of businesses are funding with personal savings. Having a pile of cash in your savings account is wonderful.  It’s money that’s there for the taking and if your business goes south, it’s all you lose.  However, most of us don’t have the type of cash we’re talking about simply sitting in an account somewhere.  Instead, we have to dig a little deeper.

Primarily when small business owners back their business with personal finances it’s their assets their talking about.  One of the most common methods is to leverage the house they live in to get the funds they need. According to the same U.S. Census Bureau study, 5.6 % of businesses are funded through a personal home equity loan. While this is a perfectly acceptable method for financing your business, it can be risky.  Not only does it set a dangerous precedent of mixing your personal assets with your business assets, you could actually lose your house if your business folds and you can’t pay your debtors.  The last thing you want to do is lose everything you’ve ever worked for in the blink of an eye because you thought a second mortgage was the only way to go.

2. The Bank

According to the survey mentioned above, 10.7 % of businesses are funded with the help of a loan from the bank. Business loans from your local bank or credit union are safe, secure, and generally available at affordable rates.  However, there are things you should consider before signing on the dotted line.

Applying for a loan with a traditional financial institution can be a bit of a process.  Not only that, you need to shop around.  Multiple banks—even within the same small town—can offer tremendously different interest rates, closing costs, and terms.  The idea is to get the best deal for your business, not simply to do business with the same bank you’ve always used.

Alan Hall, an angel investor and capitalist, says that bank loans are most appropriate for businesses that already have their feet under them—not necessarily start-ups. Why?  Because a bank is going to want collateral to back up their bet.  If you can’t offer the sort of financial assurance they’re looking for, the likelihood of you securing a loan you’re happy with is low.

Need more information about how to get a loan for your business? Contact us.

3. Interpersonal Loans

The next likely step for most small business owners—before they turn to a bank even—is to approach friends and family members for personal loans. About 2.6 % of businesses are funded using loans or money borrowed from family or friends.  It’s been done hundreds of thousands of times but it’s not necessarily the best strategy.  If things don’t work out the way you’re planning, you could end up with some people who are very dear to you being very miffed about some missing money.

If you do choose to go this route for funding your small business, approach the transaction as a business deal not a personal favor.  That means you should have everything in writing with ironclad consequences should you not live up to your end of the bargain.  Of course, this is just “preparing for the worst” but when it comes to people you see every day, the extra effort is very worth it.

4. Crowdfunding

A newer non-traditional form of sourcing funds for business growth that Mr. Hall endorses, crowdfunding is essentially the “friends and family” route “kicked up a notch or two.”

By now you’ve likely heard of Kickstarter, the website that lets artists ask others to fund their projects in return for premiums and perhaps even a bit of the fame that comes after.  Essentially, crowdfunding takes this model and applies it to small business rather than art.

Ruth Hedges, CEO of Funding Roadmap and The Crowdfunding Roadmap, was instrumental in pushing the JOBS Act which allows small business to legally use crowdfudning as a source of gathering capital.  In an interview with Devin Thorpe, the Social Entrepreneur at Forbes, Hedges said that crowdfunding is essentially a natural response to the tightening of purse strings at traditional funding sources such as banks and angel investors.  However, legal red tape was essentially holding small business back.  “It was clear that there was this securities law that was preventing all this.”  She and a group of like-minded individuals sat down and drafted the first version of the Jumpstart Our Business Startups (JOBS) Act.

Their “act of Congress” passed with bi-partisan support and was signed into law on April 5th, 2012.  The law essentially eases the security restrictions that were preventing businesses from pulling funds from large numbers of supporters.

5. Partner Up

Your business is your baby but sometimes it’s worth parting with a portion of it to ensure its future.  That’s how partnering generally works.  Partnerships are, in essence, unincorporated business relationships.  They’re still subject to taxation, regulation, and even government inspection but offer a small business owner an excellent opportunity to bring in a backer with the type of finances they need.

Every partnership is a little different.  Some partners will want a portion of the control, others will opt out.  However, all will want some of the profit.  It’s important that you have your business partnership codified in a partnership agreement that dots every “I” and crosses every “t.”

Not sure how to start the partnership process? We can help.

Times Are Tough but the Tough Get Going

There was a time, not too long ago, when businesses practically had to fend off investors.  That’s simply no longer the case.  Your small business will have to fight and scratch for every bit of capital it secures.  Fortunately, as an entrepreneur and a small business, the scales are weighted in your favor.  You aren’t subject to much of the overbearing red tape large corporations must submit to, you can bring your personality and passion into the funding process, and the number of funding outlets keeps growing every day.  You simply have to get out there and do the legwork.

About the author

Matt Faustman

Matt Faustman

Matt is the co-founder and CEO at UpCounsel. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform. Before founding UpCounsel, Matt practiced as a startup and business attorney.

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