By Myranda Mondry
You’ve got it: Your million-dollar business idea. The only problem? You don’t have a million dollars (yet—fingers crossed!). Launching a new business takes passion, courage, and, yeah, capital. If you don’t have at least a small bank of startup money lying around—few of us do—it can be the roadblock that prevents your million-dollar idea from taking off.
Fortunately, new businesses like yours have a few options when it comes to funding and capital. And you don’t have to be well versed in finance to take advantage of them. The following are a few common ways entrepreneurs can fund their big ideas—transforming them into small businesses.
1. Apply for a loan
Applying for a small business loan or bank loan is a popular option for new entrepreneurs seeking working capital. There are a number of small business loans available for new business owners, including Small Business Administration (SBA) loans, traditional loans, business lines of credit, and specialty loans. These loans come with different qualifications, interest rates, and terms—review them carefully to determine which loan is the right fit for your business.
- SBA loans are backed by the U.S. government and typically come with some of the lowest interest rates available. But because SBA loans are such a popular choice, they can be limited to those with strong credit history and collateral.
- Traditional loans come from banks and other financial institutions. These loans are incredibly flexible—tailored to what you need. But if you don’t have a solid business history or good business credit, you may have difficulty getting approved.
- Business lines of credit allow you to withdraw the cash you need when you need it—and you only pay interest on the cash you withdraw. But using a business line of credit may restrict you from securing other loans or financing in the future.
- Specialty loans are available to business owners that belong to certain groups or causes, including women, people of color, immigrants, or business owners in rural areas, to name a few. If you qualify for a specialty loan, you’ll face less competition. But a specialty loan may dictate the way you use your funding.
No matter which type of loan you choose, be prepared to show your credit history, business history, business plan, and any collateral you have to offer. To increase your chances of getting approved for a small business loan, keep an eye on your debt-to-income ratio and business credit score; pay your bills on time, pay off old balances, and increase your credit limits. If you’re a brand new business with no business history, focus your efforts on building a strong business plan and financial projections.
2. Apply for a small business grant
Small business grants are intended to help you fund your business without taking out a loan or racking up debt. Unlike small business loans, grants typically don’t need to be paid back—you get the funds you need without worrying about interest rates or repayment plans.
But it’s not just free money. Small business grants target specific groups, including minority groups, veterans, and women, or initiatives, such as scientific research or economic development. There are a number of grants available to small business owners, from federal grants, to state and local government grants, to private grants. The odds of finding a grant that fits your business are good, but you’ll have to work for it. Most grant programs come with a rigorous application process, and any grant money you receive may be restricted to certain uses.
Finding the right grant program for your business requires research and patience, but any amount of grant money can be beneficial. Your local Small Business Development Center (SBDC) can help you find grant options for your new business or big idea. As always, developing a strong business plan and value proposition can increase your chances of appealing to a grant program.
Today’s entrepreneurs have the benefit of simply asking for the money they need via crowdfunding. Crowdfunding allows you to ask for small donations from a large group of people or “backers.” Get enough backers, and suddenly you’ve got working capital!
Of course, your ask has to be convincing. Before backers donate to your cause, they’ll want to know what their money will be used for (this is where your business plan and value proposition come in). Successful crowdfunding campaigns appeal to human emotions and tell an engaging story. It’s the difference between “I need $10,000 to start my art business” and “I need $10,000 to purchase art supplies and rent space to launch my art studio where I’ll offer art classes to at-risk youth.” Which campaign are you backing?
Crowdfunding platforms like Kickstarter, GoFundMe, and Patreon make it easy to launch your crowdfunding campaign and share your story far and wide. Some platforms work on a purely donation-based model: You ask for donations from backers without offering anything in return. Others offer rewards or equity based on the amount of investment.
Crowdfunding is a great way to get funding while simultaneously building a dedicated group of supporters (i.e. future customers). But don’t make the mistake of thinking it’s a quick and easy way to get money. More than 10% of Kickstarter campaigns finish without a single pledge, according to Kickstarter data. You’ll have to work hard to promote your campaign and earn backers. Think of it as a crash course on marketing your new business.
4. Find angel investors
Brand new businesses may find financial salvation through angel investors—high-net-worth individuals willing to take a chance on your million-dollar idea. Angel investors are typically willing to invest in a business idea while it’s just that: an idea. They know there’s no guarantee the idea will pay off (but they hope it will).
If you’re not close friends with any millionaires, you can find angel investors by sharpening your networking skills or using online platforms that connect new entrepreneurs with accredited investors. But finding investors is only half the battle. Once you’ve found an investor you want to work with, you’ll need to blow them away with your business pitch and value proposition if you want them to open their wallet.
5. Minimize startup costs
No two businesses are the same. Launching a new business can cost anywhere from $500 to $50,000 or more! Your startup costs will fluctuate depending on the nature of your business and the products or services you intend to sell.
For instance, some costs, like rent, payroll, and office supplies can be avoided if you don’t intend to open a physical location or don’t plan to hire employees right away. Other startup costs, like taxes, insurance payments, or payments for certain permits and licenses can’t be avoided.
You may be able to minimize your startup costs (at least until your business gets off the ground) by starting your business using one of the many service provider marketplaces or sharing economy marketplaces available. For example, Etsy, Amazon, and eBay make it easy to sell products online. Sites like TaskRabbit, Thumbtack, and Fiverr make it easy to sell services. Use these platforms to start building your brand and your business while simultaneously building business credit and history—which can open the door to more financing opportunities in the future.
No money, no problem
Don’t let a lack of startup capital prevent you from cashing in on your million-dollar idea. There are many options for new business owners to gain access to funding (without gaining a mountain of debt along with it). No matter which path you choose, it’s a good idea to go forth armed with a strong business plan (including financial projections), value proposition, and elevator pitch. It’s a bit of work upfront, but it’s a good exercise to get a clear picture of your business idea. With any luck, your time investment will pay off in cash.