So you have an amazing idea for a business, congratulations! Now if only you had a pile of money to start…
When you first start a business, it can feel very normal to spend money you don’t have yet. One way to get in a lot of trouble quickly is to charge business expenses on a credit card and carry a balance. Business loans are typically low interest (less than 10%) while credit cards can be 25% or more. In other words, do anything but put it on a credit card! Similarly, most loans with super quick approval rates may have high interest rates and variable terms. Before you spend any money, read the fine print and understand what you are signing up for.
A great first step is to figure out how much it will take to start your business. The SBA has this handy printable PDF that will help you figure out your startup costs.
Now that you know how much you actually need, let’s look at some real options you can use to start your business.
The reality is starting a business costs way more money than you think… and you turn a profit more slowly than you think. Many people start their business part time while remaining in their job or work “side hustles” to make sure money continues to come in. That said, a pile of cash for larger expenses is never a bad idea and some people work out of their savings for awhile. Start a savings account for the occasion and make a plan to contribute to it on a regular basis over the next six to twelve months.
Microloans are a category of loans that are usually very small (under $5000) and very short-term (less than a year). Often the investors get to choose who gets their microloan. This concept was popularized in other countries by organizations like Kiva (ex: you can loan Sarah in Kenya $200 to buy certified seeds and fertilizer to improve her harvest) but microloans are also available locally through development offices, organizations, private investing clubs, and individuals. A quick search of ‘chicago microloan’ shows the current local options.
Websites like GoFundMe and Kickstarter allow individuals and businesses to raise money over a limited period of time for a specific project or idea. For making a donation, funders get “perks.” For example, a local pizza place wanting to fundraise for an authentic brick oven may give all $50 level and above contributors a free t-shirt. Where microloans come from an individual or small group, crowdfunding comes from the masses. Crowdfunding websites typically are paid through a percentage of contributions. Certain crowdfunding sites specialize in certain products/businesses.
Shows like “Shark Tank” and local pitch competitions have made the idea of pitching in front of a group of investors popular. Venture capital investors give money for a percentage of company ownership. They are interested in companies with high profit margins that can scale quickly (so they get their investment back fast and a great rate on return). There are lots of venture capital firms here in Chicago but investments are typically not limited by geography, but it does help to have a local connection.
Line Of Credit
If you have no business credit yet, typically you are borrowing based on your individual credit. If your business does have some credit, you might be able to set up a business line instead. Regardless of whether it’s business or personal, a line of credit lets you access funds when needed and pay interest on what you borrow for the time borrowed. For example, a small business owner may have a line of credit of $1000 to help run payroll if funds haven’t come in by the time payroll needs to run… and put it back three days later when funds have come in. Interest is typically around 3-5% making this an affordable way to have temporary access to finances.
Business Loan (Online Or Community Bank)
You may have seen mailers or gotten phone calls about a line of credit up to $250,000. Both online lenders and traditional banks offer business loans.
Usually to get a business loan, you need to show a certain amount of revenue or business value, which is why most people start funding their first businesses one of the other ways outlined above. That said, business loans have typically an easy to fill out an online application or you can talk to us to see if you’d qualify.
Regardless of funding source, whoever is loaning you the money has to see you have plans to get them their money back, and then some. So borrow carefully, plan carefully, and work hard and you can take your fabulous business idea all the way.