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Funding a Business: Seven Unique Options

Finance
Article
11/12/2018

Launching a startup requires passion, perseverance, and a great business idea. It also requires money, and without a long and successful business history, getting startup funding for a fledgling company through traditional channels may be challenging.

A recent report from Paychex, Accelerating the Momentum of American Entrepreneurship, reveals that access to capital investment is considered the largest barrier to starting a business. The solution? In addition to applying for traditional small-business loans or grants, you may also wish to consider non-traditional avenues when funding a business idea. Here are seven ways you could fund your next venture:

1. Personal credit

One of the fastest and easiest places to start funding a business startup may be in your own pocket. In a pinch, personal credit cards can be an answer to financial woes. Other personal credit options for financing a new business could be an unsecured personal line of credit, a signature or a home equity loan, if you're a homeowner. In fact, the use of personal assets like cash savings or home equity collateral for a loan was ranked as the most popular method for funding a new business in the United States.

2. Borrow against 401(k) or life insurance

If you're looking for creative ways to fund your startup, you may consider borrowing from yourself. If you're eligible for a 401(k) loan, you may be able to borrow up to $50,0000, based on your current balance, and pay the funds back over time, with interest. But before you do this, know that there are some disadvantages to going this route. So even if you can obtain a loan from your 401(k) fairly easily, take serious consideration before drawing from your account.

You may also want to pull out your life insurance policy and read the fine print to determine if and when you can take a loan against the current cash value. Contact your insurance professional for details on how borrowing against life insurance works, and always calculate a cost-benefit analysis before borrowing from your retirement or life insurance funds.

3. Family

Financial support from a relative was named as a top funding source by small-business owners, according to a recent survey. Some of the most successful businesses like Amazon and Chipotle started this way. If your parents are still reeling from contributing to your college education, consider approaching a grandparent, uncle or aunt, or even cousins who may be interested in investing in your venture. Family members may be more likely to support your dreams when they've started and succeeded as entrepreneurs or business owners themselves.

4. Pawn shops

Today's pawn shops have come a long way from the seedy establishments of your grandparents' day. If you have something that you're willing to pawn for quick cash, a trip to the pawn shop could launch your startup funding. And if you don't want to deal with a local pawn shop, check out one of the online pawn shops — but do your homework and check with the Better Business Bureau to ensure you're dealing with a legitimate operation.

5. Crowdfunding

Crowdfunding refers to funding a business (or any endeavor) with small contributions from many donors, patrons, or investors. If you're considering crowdfunding, it makes sense to look at the more popular platforms and select the one that fits best with your individual venture. Fee structures also vary, so it's a good idea to review the list of charges before you launch your campaign. Here are some of the most well-known crowdfunding websites:

  • Kickstarter: Helps creators of all kinds gain funding for projects such as new apps, music and films. Funds raised must go toward a specified project and you may not offer an equity investment. The fundraising model is described as all-or-nothing, so if you don't reach your stated goal, you won't receive any of the pledged funds.
  • Indiegogo: This crowdfunding platform allows for more varied options, including equity funding. You can also sell your finished product in their marketplace, upon completion.
  • Patreon: This subscription-based service allows creators to receive funding from "patrons" who provide financial support in exchange for access to exclusive content.
  • Crowdfunder: Provides access to an investor network for entrepreneurs looking to raise money through equity funding. The platform caters to active startups and more mature businesses seeking Series A and B funding, rather than focusing on businesses and products still in the inception stage.

6. Peer-to-peer funding

Similar to crowdfunding, peer-to-peer funding simply lets other businesses invest in your business, and finding willing investors may be as simple as applying online. Small businesses can find one-to five-year loans, available from services such as PayPal and Lending Club. Take note though — the convenience can be costly, as interest rates on these types of loans span a wide range.

7. Find an angel investor

If your startup has real "wow" power, you may have a shot at attracting the attention of an angel investor. These individuals are high net worth investors who provide seed capital to startups. To find an angel investor, start by letting your family, friends, and business contacts know that you're looking for funding. Your accountant and lawyer may also be good sources of potential angel investors. When searching for this type of investment in your startup, have a solid business plan prepared and be ready to pitch your ideas when asked. Carry business cards with updated contact information and your company's website.

Funding a business idea may be the first of many challenges you'll face as an entrepreneur. Get creative, stay determined, and look for startup help to see your great idea blossom into a successful business. Soon you'll find financing new projects and expansions less difficult as your business thrives.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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