For every startup, money is one of the biggest worries. Starting entrepreneurs may face challenges in getting a loan for their small startup. It can be difficult to find someone who would be willing to lend a substantial amount of money to your small business that is not even making revenue or income yet. The risk is so high on those big ideas and plans that it’s almost impossible to get it started or launched.
Since you are just beginning, you are likely to start by borrowing some money from your personal savings. In order to be qualified for startup financing, you must have a personal credit score of at least 720. If not, you should elevate your credit score by checking if there are any mistakes on your credit reports that could weigh down your score. If there are disputable mistakes, file a dispute with the credit bureaus. Then take steps in maintaining a low balance on all your credit cards, and be sure to pay your bills on time.
Many use credit cards for funding their small business. But they can also be an expensive way of funding your startup, especially if you have bad credit. Secured credit cards have higher fees than regular credit cards. The card issuers determine the annual percentage rates basing largely on your personal score. Research has shown that startups or small businesses that rely on heavily on credit cards for their financing typically fail.
Microloans from nonprofits
Aside from growing your personal credit score, there are also other proven ways to finance your startup. You can turn to nonprofit lenders who offer loans from nonprofit or government programs to disadvantaged communities. Some microlenders even operate internationally to help entrepreneurs develop nations.
They are more focused on the mission and not on the profit. Their goal is to help struggling economies and they typically offer loans up to $50,000 to startups. Most of these nonprofit and microlenders even provide pro bono training and consulting to small businesses to help them build credit.
Family and friends
One of the most popular ways to kick-start your new business is to ask help or borrow money from family or friends. You have to ensure that your credit is good so that your friends and family will be convinced to lend you the money. If you have a bad personal credit score, it would take a whole lot of convincing to get them to lend you the money for your startup.
The downside to this method is that if your startup doesn’t work, it does not only affect you financially but also personally. So choose wisely on whom among our friends and family you are going to borrow money from. Make a list of friends and family who understand your plans. It is important that you make them aware of the risk involved and that they would be comfortable with that.
This is one of the most popular ways to raise money for a startup. Sites such as Kickstarter and Indiegogo let you solicit funds for your startup through online campaigns. You do not need to pay the donors back, instead you give them gifts, a system which is called rewards crowdfunding. Equity crowdfunding is also another way to finance your startup where you tap a pool of investors to agree on financing your startup. In return, they get equity ownership.