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Bootstrapping a Business
As challenging as it may sound, bootstrapping your startup company may be the best option. Bootstrapping is when an entrepreneur or business owner starts a company with little capital other than their personal assets. The beauty of bootstrapping is that you retain complete control over your company. You owe no money and have not accepted any outside investors. The disadvantage is the financial burden placed on the entrepreneur.
Self-funding may require the pledge of personal assets. Since most people's largest asset is their home, you may find yourself in a position where you need to access the equity you've built up. Utilizing your personal savings or 401(k) is another option.
There are numerous possible bootstrapping methods, which are outlined below.
Refinancing
Refinancing entails submitting an application for and receiving a new mortgage on your home. You may be required to pay high fees and closing costs, such as the cost of a home appraisal. You must also undergo a credit check. Ensure that you can obtain substantial funds from refinancing your home; otherwise, it may not be worthwhile.
Home Equity Loan
Equity-based home loans are second mortgages. You obtain a loan based on the equity you have established in your home. The loan against home equity is a second-lien loan. If you have enough equity in your home to qualify for a home equity loan, you must go through the same application and qualification steps as with a conventional mortgage. If approved, the loan is repaid in monthly installments. Typically, a home equity loan carries a higher interest rate than a primary mortgage.
Home Equity Line of Credit (HELOC)
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A HELOC is a line of credit granted by your lending institution against the equity in your home. It is more flexible than a home equity loan because the interest rate is variable and, in most cases, lower. The lender establishes the maximum amount you can borrow, and you take out only as much as you require. You may be able to negotiate a period of interest-only payments, which is superior to the terms of home equity loans.
Friends and Relations
The benefit of financing your startup business with the help of family and friends is that the repayment terms are frequently quite flexible. This may be crucial during the first few years of your business' existence. If you are agreeable, you must consider that they may want a stake in your company.
Individual Credit Cards
Small businesses typically do not use credit cards for startup expenses. Small business owners utilize personal credit cards with high credit limits to access debt financing on occasion. However, the Small Business Administration (SBA) reports that less than 10% of entrepreneurs use credit cards as a source of capital.
Small Business Loans
When launching a new business, many entrepreneurs first consider obtaining a bank loan. Even the business owner's own bank may not be interested in an unproven company. Many banks are unwilling to lend their limited funds to a potentially failing startup. There are a variety of financial institutions and other lenders that entrepreneurs can approach for start-up business loans. Here are some loan types and lenders that may be available to a new small business.
SBA 7(a) Loans
SBA 7(a) loans are frequently granted to businesses that already have adequate capital and in which the owner has invested personal funds.
Apply for a 7(a) loan if your small business needs to purchase real estate and you meet the eligibility requirements. Receiving one is not impossible. The SBA guarantees 85% of a 7(a) loan up to $150,000 (and 75% above $150,000) with more favorable interest rates and terms than standard bank loans.
SBA Microloans
Microloans from the SBA can benefit both new and existing small businesses. If a startup business does not qualify for a conventional bank loan or an SBA 7(a) loan, which is often the case, it may be eligible for an SBA microloan.
The maximum loan amount is $50,000, with favorable interest rates and terms. Collateral might or might not be necessary. With microloans, the SBA collaborates with intermediary lenders (called microlenders), which are specially designated, non-profit community-based organizations that administer the programs and offer training and planning advice.
Business Credit Cards
If you do not qualify for a microloan, a business credit card is an alternative debt option. You can qualify for a business credit card even with a small business if you have good to excellent credit and an acceptable debt-to-income ratio. Keep in mind that the card's interest rate will be higher the lower your credit score. You could potentially qualify for multiple business credit cards.
Small Business Grants
Free money is the best kind of financing for a small business to get their hands on. There is a wide variety of financial assistance available to small businesses through grants funded by both the government and private businesses. Other grants are offered to people who fit into specific categories. While others are available to only certain types of businesses.
SBIR/STTR Grants
If you are able to meet the requirements, the Small Business Innovation Research (SBIR) Grant and the Small Business Technology Transfer (SBIR/SBTT) Grant both have the potential to become valuable sources of funding for your small business. Each year, the various departments and agencies of the federal government provide a significant amount of funding to new small businesses that have innovative ideas that are in line with their missions. The Departments of Agriculture, Energy, and Defense are some examples of government organizations that hand out Small Business Innovation Research grants.
The Small Business Technology Transfer (SBTT) grants are more difficult to acquire and center on the transfer of technology from research institutions to small businesses as well as the general market. Consult the Eligibility Guide if you want to find out whether or not your company is qualified to submit an application for either the SBIR or the SBTT grant.
In order to qualify for a grant from the federal government, a small business will typically need to demonstrate that it satisfies the standards established by the Small Business Administration (SBA). These standards dictate the maximum number of employees that the company can have as well as the maximum amount of profit that it can make each year.
Other Grants from the Government
There are additional grants for small businesses available, including the following:
- Grants for small businesses offered by corporations Frequently, large corporations will offer grant money to smaller businesses.
- Targeted small business grants: These grants provide financial assistance to a variety of different demographic groups who are just getting their businesses off the ground.
- Grants offered by state and local governments States and municipalities often offer financial assistance to small businesses in the form of grants to address challenges that are unique to that region. To learn more about these opportunities, you should contact the Chamber of Commerce in either your state or your local area.
Small Business Investment Companies (SBICs)
The Small Business Investment Company (SBIC) Program was established so that small businesses could receive funding for risky business ventures. Private investment firms that are looking to make a profit fall under the purview of the Small Business Administration, which issues licenses and oversees regulatory compliance. These businesses have the potential to become an essential source of equity capital for smaller companies. The Small Business Investment Company (SBIC) provides small businesses with a list of investment firms that take part in the program.
If a conventional bank has already rejected an entrepreneur's loan application or if the prospective business owner has been warned that obtaining startup capital is challenging, the entrepreneur or aspiring business owner may be hesitant to pursue funding for their new company. There is a wide variety of potential sources of funding available for the launch of a new small business, including loans of varying terms and amounts. There are also grants that are made available from the government, corporations, and other entities. SBICs and angel investors are two other sources of equity capital. There is no such thing as a one-size-fits-all solution, but there is almost always a solution that will work for you and your company.
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