As you prepare to become your own boss, you need to get your finances in order. You’ll need enough money to cover 6 to 12 months of business and personal finances before you even launch your business. That being said, you have a few options to consider in terms of where that money comes from.
If you’re lucky enough to have a well-padded savings account, kudos to you. This should be your first option for funding your business. Note: don’t jeopardize your own future by taking the money out. If you have a savings account to cover “rainy day” home repairs, the last thing you want to do is take that money out, and then find you need a new roof!
Consider leaving your money in your savings or money market account, and just taking what you need. That way, your money continues to earn interest.
Benefits: Using your savings account keeps you from having to take out a business loan, which many entrepreneurs are reticent to do. If you have less than stellar credit, you can purchase a Certificate of Deposit and use it as collateral for a loan while earning interest.
The Small Business Association (SBA) is set up to help businesses get the money they need to start a business. There are banks that cater to small businesses just like yours that can help you find a great rate. Start with your own bank, or look for one that does small business lending. Look for alternative lenders as well, such as Women’s Business Loans. (Note: banks don’t lend to startups, so you’ll need to be in business two years prior to applying for a traditional bank loan.)
Benefits: The SBA provides a guarantee for business loans, which means applicants with challenged credit score still have an opportunity to get funding.
Your Retirement Fund
You can borrow against your 401(k) to start a business. With this option, you essentially use your own money to fund your company, then pay yourself back. Just make sure you pay it back! Sometimes there can be penalties for borrowing funds, so you want to make sure you are aware of them before you take this option.
Benefits: 401(k) financing actually has lower risk than an SBA loan. If things go badly, you still have to pay for the loss, but the 401(k) provides before-tax money, reducing the effective cost. Plus, there are no credit implications and your house is not on the line as collateral.
Home Equity Line of Credit
If you own your home, borrow no more than 80% of your home’s value through a home equity line of credit to avoid having to purchase private mortgage insurance. You’ll increase your chances of getting approved for one if you have great credit and good payment history. Make sure to pay attention to what current interest rates are before deciding on this strategy. And remember: you’re putting your house on the line, so if your business fails, you risk losing it if you can’t pay the loan.
Benefits: Funds are easy to access once you’ve been approved. The interest is tax-deductible, since it’s mortgage interest.
Friends and Family
Having a friend or family member who’s willing to invest in your business idea is a real boon. Some may want to be involved in the business in exchange for the investment, while others may hand you a check and say “pay me whenever.” Either way, make sure you’re clear on payment terms (and offer interest) and how willing you are to have someone involved in helping you make the business decisions.
Benefits: If you have a family member who can afford to lose the money they invest in your business, this means they could be more patient with letting you build your business.