There are more ways than ever to fund your business these days, and knowing how much you can afford to invest in a business is every bit as important as knowing how much you can invest in a house. Of course there may be a range of what you are willing to invest when you factor in the ROI, your overall financial picture and other factors. But the question, “where does the money come from” is probably one of the first questions most people ask when starting a business.
There are probably more ways than you are aware of, and it’s possible to use a combination of these options.
The availability of funds and what you may qualify for depends on a number of factors including your own credit score and net worth.
Frequently more than one source of funds is used. The typical places money comes from outside of your own savings include:
ROBS – Called “Roll-Overs for Business Start-Ups,” this allows you to use funds from your 401k, IRA, 403(b) or other retirement account with no taxes, penalties or debt. It can also be the necessary capital injection for a Small Business Administration (SBA) loan
SBA Loans – The Small Business Administration does not actually provide loans; they guarantee a part of the loan for local banks, thereby mitigating some of the risk those banks incur in making the loan. Ranging from micro-loans (under $50,000) to loans of up to $5 million, the rate is typically Prime plus 2.5% and the term is typically 7-10 years.
Conventional Loans – these loans are made by banks without the benefit of the SBA guarantee, and can be much harder to obtain because they are primarily made based on the credit risk of the business and collateral provided by the borrower.
Securities Backed Line of Credit – allows you to use your portfolio to guarantee a loan without disrupting your investments, and typically has a lending rate of only 2 – 4%
Home Equity Loans and HELOCs – it is possible to get a loan based on the equity in your home and use this money for your business.
Equipment Leasing – you can frequently get funding for 100% of the amount of any machinery, equipment and vehicles.