Startup Business Loans – How to Fund a Small Business in 2018

This article explores the range of startup business loans and other ways to fund your new business. We consider the pros and cons of everything from bootstrapping to Rollovers for Business Startups (ROBS).

ROBS is a less well known option for people with an career behind them. This allows you to withdraw some funds from your retirement plan to invest in your business without financial penalty.  You can learn more about this option by talking to an experienced ROBS consultant, reach out to Guidant.

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Startup Business Loans – the Pros and Cons of Each Option

How to fund the growth of your small business is an important decision to get right. Not only should you consider the best case of successfully delivering your business plan. You should also carefully consider what will happen if things don’t work out so well, and whether you can accept the financial consequences.

Further below we look at what you will need to prepare to make a funding or startup business loan application. But first let’s take a look at 11 major sources of funding and share with you the key pros and cons of each.

Bootstrapping

Bootstrapping means to self-fund your business without borrowing money. This is by far the best startup business loans option if you can find a way to ‘pull-in your bootstraps’ and make it work.

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A quick way to ascertain whether this is viable is to create a simple business plan. Or if you just want a quick top-level view as this stage, we have created a free break even analysis spreadsheet with formulas. In a nutshell, you breakeven when your business costs match your revenues for the first time. After this point, you start to make a profit. Often investors refer to this as being able to ‘wipe your own face.’

Your break even analysis will help you to find out how long it will take to breakeven. It will also tell you how much cash you need on a month-to-month basis to pay suppliers, and for how long.

Thereafter, you can work out how to further reduce costs and/or start bringing in customer revenue sooner. This will help you to break even sooner. But don’t forget, your break even analysis is not a predictor of customer demand, just your best guess of what you reckon you can achieve. As a result, it makes sense to be conservative about sales targets so that you can get a more realistic picture.

Bootstrapping: Key Pro and Con Explained

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If you can find a way to bootstrap, this will be the best option for most small businesses. This is because you will not owe money to anyone that you may not be able to pay back easily if things don't work out. You won't be paying interest on borrowed money, which increases the cost of funding. And you won't have to answer to investors. Let's face it, if you won't invest what you can into your own startup, why should anyone else?The main con of bootstrapping is that you will have limited funds. With more funds maybe you could scale you business faster? This argument works best for early stage tech startups, where speed to market can be business critical to avoid being left behind in a fast moving tech market. For the rest of us, it makes more sense to be patient.

Rollovers for Business Startups (ROBS)

A way to leverage your ability to bootstrap your business, is to explore ROBS as an additional startup business loans option.

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A ROBS uses money from your 401k or IRA to invest in your business. It’s not a loan because your saving plan becomes a shareholder in your business. And when your business starts to make a profit and pays out dividends, your savings plan will be one of shareholders that benefits. If you want to explore this in relation to your own retirement savings plan, you can reach out to Guidant to speak to an experienced ROBS consultant.

ROBS: Key Pro and Con Explained

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You're not borrowing money so there's no monthly repayments to make. However, your retirement savings plan becomes an investor and receives it's share in your success. And setting up a ROBS does not stop you  from also pursuing small business loans options. Rather, it demonstrates your confidence to have someo of your own skin in the game.There are fees to setup your ROBS. Typically it can cost around $5k to setup and thereafter there are yearly costs to manage it. And of  course, if your business plans fail, you will leave a dent in your retirement savings so you have to be confident your business plans will succeed.
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Small Business Credit Cards

Many small business owners also use credit cards on a flexible basis as another source of funding. This can be useful short-term option if payments you were expecting to receive are late.

Small Business Credit Cards: Key Pro and Con Explained

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This option can provide you with the flex you need to respond to short-term cashflow issues, and it's relatively easy to get a business credit card in place. The cost will depend on your personal credit rating. If you are disciplined about using them purely for short-term tactical needs they are a great tool to have in your small business loans toolkit.Credit cards are an expensive way to borrow money, and should only really be used to flex for short-term requirements. In addition all available research shows that small businesses that depend on credit cards for long-term funding are more likely to fail than succeed.

Friends and Family

The next best startup business loan option, is to turn to the people you trust the most. Like with bootstrapping, we recommend you create a realistic business plan, including a break even analysis and forecast cashflow, before approaching a trusted friend or the bank of Mum and Dad. Why? Because they will be backing you, and to some extent taking your word for it that the money you borrow will get paid back over an agreed period of time.

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Another way to involve friends and family, would be to bring them onboard as a silent investor in the business. In this way they would have a minority stake in your business and share in your success, and you would not owe them money.

Friends and Family: Key Pro and Con Explained

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Unlike a lot of the small business loans options below, you may not have to pay interest on the money you borrow. This depends on how generous your friends and family are of course. They are also likely to give you a bit more slack, should you need a bit more time to break even than you originally thought.If things don't work out, you could end up owing the people you are closest to a lot of money. And this can have a big negative impact of your most important relationships. We recommend not considering this option if you wouldn't usually mix business and pleasure.

Small Business Grants

Free business grants are arguably a better small business loans option for you than borrowing money from friends and family or bootstrapping. A business grant, it a gift of funding that does not have to be repaid. These grants tend to be made by government departments, foundations and large business and align with their ethos and the objectives they want to achieve.

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It’s worth researching this in more depth to discover grants relevant to your business. By way of example, Grants.gov is a database that contains all of the federal grants to business. The focus is on funding ideas and projects that help improve provide public services and stimulate the economy.

In practice, most entrepreneurs that manage to succeed in securing a grant, will also be bootstrapping and maybe borrowing money from friends and family too.

Small Business Grants: Key Pro and Con explained

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If you have the time, what's to lose? Getting a financial gift to help you move your business forward without owing anyone money is well worth researching especially if you are an innovation business or provide a public service.It takes time to root out grants that are relevant to your business model and apply for them and the competition is very stiff. We would recommend applying for any grants where you meet the criteria. But don't count on succeeding. Better to pursue other funding options at the same time and viewing the award of a grant as the cherry on the cake if it comes off.

Crowdfunding

A relatively new alternative to a small business loan is crowdfunding. If you confident that your ideal customers will be super passionate about what you offer then this is a excellent option. You post your offer on a platform like Kickstarter and the platform crowdsources donors who pay for the reward you re offering.

Kickstarter was the first and is still the best known, though good challenger brands like Indiegogo are now coming of age.

Crowdfunding: Key Pro and Con Explained

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It's easy to signup and start a campaign and you're not paying interest on a loan or potentially getting into debt. Instead, a large number of independent people choose to donate a small sum to you in return for a reward. This is an excellent alternative to a small business loan for businesses with a strong brand who are experienced in running full-on marketing promotions.It's a lot of hard work and if you do not achieve your funding target, you get nothing in return for putting your heart and sole into crowdfund raising.

SBA Loans

A wide range of SBA loans are available from the Small Business Administration. Typically the SBA acts as a guarantor for loans made by banks. Money secured by the SBA brings down the cost of money considerably as it reduces the bank’s risk.

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The most common SBA loans taken out by small businesses are the SBA 7a Loan Guaranty program and the SBA (7m) Micro Loans program.  These loans can be used for a wide range of purposes including; working capital, to buy machinery and equipment or pay for business premises.

SBA Loans: Key Pro and Con Explained

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Having the SBA as your guarantor brings down the cost of money considerably. An SBA loan with typically cost 6 to 9% per year.Unless you have an excellent credit rating, you will struggle to get an SBA loan. And of course, you have to pay the loan back. The SBA is only a guarantor of last resort.

Home Equity Loans

Another solid option, is to take out a small business loan secured by you home. Securing a business loan on your home reduces the risk considerably. As a result the cost of the loan comes right down to around 3-5% per year.

There are two main forms of home equity secured loan:

  • Home Equity Loan (HEL) – like it says on the can, you raise a lump sum and typically make regular monthly loan repayments
  • Home Equity Line Of Credit (HELOC) – again, like it says on the can, you secure an open line of credit that tis secured on your home. This works a bit like a business overdraft. You pay an agreed rate of interest for the amount of money you borrow at any given point in time.

Home Equity Loans: Key Pro and Con Explained

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If you have equity in you home, this is a relatively quick and easy option to activate as a more competitive cost than most other small business loans options available to you.The con is obvious and sobering. If your business plans fail, your bank could call your loan in and if you cannot pay it then they can and would force the sale of your home as a last resort.

Equity Crowdfunding

This option crowdsources angel investors who each get a small stake in your business based on the same terms. We prefer this model to raising money with one angel investor. This is because you will be less likely to get one rogue investor trying to tell you how to run your business. Three of the better known equity crowdfunding platforms are Angel List, CircleUp and OurCrowd, but you should also do your own research and explore a much wider range of options.

Equity Crowdfunding: Key Pro and Con Explained

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This is a good option if you have a credible startup team with proven skills combined with a realistic, fast growth business plan. For younger founders in particular, this is a great option as experienced non-execs will help you to avoid the pitfalls, grow faster and maximise the sale price of your business.If you know your business is going to be very successful, it's probably the most expensive way to raise the funds you need. If you have to give up 50% of your equity to get $250k in equity funding and your business is worth $25m in five years time, you may end up kicking yourself.

Micro-loans

A great small business loans option is a micro-loan. Yes, its a loan and it needs to be paid back, but it comes from a micro-lender, which are non-for-profit organisations like the government, foundations and registered charities.  For example, Accion makes startup business loans to women, veterans and startups in economically challenged neighborhoods. The main focus of a micro-lender is to offer loans to small businesses in disadvantaged communities.

Micro-loans: Key Pro and Con Explained

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If you are eligible, you could secure a business loan for up to $50,000 of more favorable terms than you could hope to get from a commercial lender. This is because micro-lenders are more focused on their mission than making profit. You will also get free access to a wealth of business consulting experts to help you succeed.There aren't really any big downsides to this option. You will owe money, but your lender will be more interested in seeing you succeed than anything else. However, it can take quite a while to secure this form of funding. So if you're in a hurry, we recommend pursuing other small business loans options at the same time.

Personal Business Loans

Most experienced entrepreneurs would view a personal loan as a loan of last resort. That has changed somewhat in recent years as sites like Lending Club have started to offer small business loans. It’s worth shopping around because this kind of loan typically costs anything from 10% to 30% a year.

Personal Business Loans: Key Pro and Con Explained

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As a loan of last resort, assuming you cannot get a more competitive SBA loan, this funding method will provide you with a way to fund your business plans.It's one of the most expensive small business loans options, and if your business plans fail, they will still expect to be paid.

The Juice Press

This article has shared the major small business loans options and alternative sources of funding currently available. These options should not be considered in isolation and many will work well together. We recommend your starting point should be to create a business plan and then work out if you can bootstrap your business. If not, the rest of the options are all worth exploring, but be careful to pay close attention to both the pros and the cons.

If you are bootstrapping with a career behind you already, you can leverage your available funds by considering a ROBS. This will enable you to access your retirement saving plan. If you want to explore this further, you can reach out to Guidant to speak to an experienced ROBS consultant.

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