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If you have a young company, obtaining a traditional bank loan may be difficult, so you will need to find an alternative. Lucky for you, many successful companies have already proven various methods to do this. The following are 5 Ways to Finance Your Business, in order from cheapest to most expensive.
1. Get a Loan from Friends and Family.
Your friends and family trust you, right? Well then they should loan money to your business! In good faith, you should make this agreement as formal as possible, with a contract stating all repayment terms. This is by far one of the cheapest methods of financing.
2. Home Equity Line of Credit (HELOC).
This is a loan, using your home as collateral, which means you are using your home to guarantee repayment of the new loan. There are closing costs and annual interest rates to consider here, though generally, this is one of the cheaper financing options.
3. Use Your Retirement Account
Working within very clear guidelines set by the IRS, you can actually utilize money from your personal retirement accounts to finance your business.
ROBS 401k: which stands for Rollover for Business Startups. This allows you to fund a business without taking a withdrawal or a loan against your 401K - the 401k will essentially own shares in your new business, so long as you abide by guidelines. Just remember - to leave something for your elder years.
4. Charge Business Expenses to your Credit Cards
There is a cost here in the form of annual fees & interest rates which are near 20% on average. A famous example of this is, the Happy Family Organics Brand - the founders took on $200k of credit card debt to finance business operations, eventually becoming so successful, they were acquired by French Groupe Danone for $250M.
5. Find Private Investors outside of your circle to back your business.
Investors for early stage companies typically come from the following 3 categories: Crowdfunding, Angel Investors & Venture Capital. Let's go through these...
Crowdfunding: sharing your business idea via an online platform which allows others to invest small amounts of money for potential profit and rewards.
Angel Investors: wealthy individuals who provide their personal money as a loan for your business, expecting 25% or more in returns, or an equity stake, a.k.a. shares in your company.
Venture Capital: a group of investors, small or institutional who often require up to 20% return on their money, an equity stake, or often, a hybrid of the two.