O is for Opening a Business without Credit

O is for Opening a Business without Credit
Personal Finance from A to Z
Eileen St. Pierre, The Everyday Financial Planner

You’ve had this idea in your head for years. Now you have reached the point in your life when it is time to see if this idea will work. Starting a business can be exciting and scary at the same time, particularly when it comes to financing your new venture. Luckily the internet has made it easier for entrepreneurs to raise funds.

For those of you who do not have much of a credit history, raising funds can be especially daunting. Here are some tips to help you open your new business.

letter-o-formed-by-wine-capDetermine how much money you will need.

Complete these three financial plans:

  • Business Emergency Savings Fund – Set aside money for living and business expenses for at least three months in an account and do not use it for any other purpose.
  • Cost of Living Budget
  • Cash Flow Projections for the first 12 months

[Templates of these financial plans can be found at http://srdc.msstate.edu/cashing/ under the Searching for Capital lesson.]

Determine where the money will come from.

You will need to have some level of personal savings in order to start your business, how much depends on the nature of your business. This is referred to as having “skin in the game.”

You can also look for sources of funding from:

  • Friends and relatives – You can develop a more personalized loan agreement and pay a lower interest rate (if your friends and family agree, of course).
  • Life insurance – Unless you have a term life policy, other types of life insurance build up a cash value. You can take out a loan against up to 95% of this cash value. As long as you continue to pay your premiums, interest on the loan may be deferred (consult your policy for the specifics). Just keep in mind that the loan will reduce the face value of the policy – in the event of death, the loan has to be repaid before beneficiaries receive payment.
  • Government programs – Funding may be available from federal, state, and local governments. Examples include Small Business Administration (SBA) loans, Rural Economic and Community Development loans, and special programs for women and minority groups.
  • Crowdfunding

Types of Crowdfunding

Crowdfunding is the collection of finance from backers—the “crowd”—to fund an initiative and usually occurs over the Internet. It is hard to keep up with all the different types of crowdfunding sites. Here are five basic types of models:

  • Startup Equity – Allows a large number of small investors to help fund startups in exchange for an ownership stake. Examples include Circleup, EarlyShares, SeedInvest, and WeFunder.
  • Good-Cause – People can donate money to a project with good moral/ethical value. Examples include StartSomeGood and Facebook Causes.
  • Pre-Order – People make online pledges during a campaign to pre-buy the product for later delivery. A good example is Kickstarter.
  • Rewards-Based – Investors get the satisfaction of helping you out, and immediately get a pre-determined reward or perk, but no equity or finished product. Examples include IndieGoGo, Crowdtilt, Peerbackers, and RocketHub.
  • Micro-Financing or Peer-to-Peer (P2P) Lending – Borrow money from a number of people online and pay them back after the project is finished. Examples include Kiva, Lending Club, and SoMoLend.

With all these crowdfunding sites, there are costs and fees involved.

  • Fees based on your funding goal or a % of funds raised
  • Processing fees
  • You will need to create your own narrative and/or video to convince investors to fund your idea.

Yes, starting a business takes money. The internet has leveled the playing field, making it easier for small entrepreneurs to get funding. But it also takes creativity and self-confidence. Let O stand for optimism. Good luck!

Visit my Basic Financial Management page for more information.