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- The kinds of funding a startup can get depend on how long its doors have been open.
- Good personal credit can get a startup off the ground.
- You can use collateral to make up for bad personal credit.
- If you've been in business for a year or more, you can try private investors and alternative lenders.
- With good financials, you can try to get a credit line.
- A startup at any stage can build business credit, or try crowdfunding for groundbreaking ideas.
- For select types of businesses, grants can also work.
Starting a business is an invigorating, fun, scary, inspirational challenge. It also costs money.
When you are starting out, all you've got is yourself. You might have a partner or two. You may have seen other entrepreneurs getting venture capital funding (or trying to, or talking about it). But if you don't have a groundbreaking product or service, VC funding is likely off the table.
Other startups might be getting angel funding. Even your mom might offer a little something to get you started.
But all those things come with a price: equity. VCs won't rain money on you unless they can get a part of your business in return. The same is true of angels you don't know well. It's only fair.
Your mom might consider it a gift and not want anything in return. But if her gift to you goes beyond the IRS annual exclusion, the gift tax could apply. To get around this, your mom could keep her gift under $15,000, or pay the tax if she goes over it – or you could give her consideration for her cash. Again, this is equity most of the time.
But what if you want to keep 100% of your business? There are options out there.
Brand-new startup ventures
For super-new companies, funding that demands a minimum time in business won't work. Instead, play to your strengths; there is funding to match.
Those with good personal credit? Use it to get started.
If you have good consumer credit, take advantage of it to get the startup going. A good FICO score goes a long way. It shows lenders you are trustworthy and pay debts on time. It's also helpful in getting loans. Even many online lenders prefer the business owner to meet a FICO score threshold.
What if you don't have such great personal credit? Guarantee with personal assets and collateral.
As always, pay bills on time and in full. Never borrow beyond what you can pay back, because now, personal assets could be on the line if you pay late.
Rates are often 5%, and they can even be less. Personal credit rating doesn't matter. For collateral, use your inventory, accounts receivable, a 401(k) or any stocks you own. You can also work with a credit partner and tap into their stocks or 401(k) for collateral.
Startups with some time under their belts
Got some time in business? Does the company own equipment or have inventory? If so, your venture may qualify for other types of financing.
Start with loans. There are many loans startups can get, and they often don't come from banks. (Pro tip: Check with your alma mater first. It may have something.)
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Private investors and alternative lenders
Almost all these programs demand two years of tax returns, which must show a profit.
Private investors and alternative lenders may grant credit lines. These are a lot easier to qualify for than, say, conventional SBA loans. They also want much less documentation for approval. These alternative SBA credit lines often need good FICO scores for approval.
Unlike the SBA, many of these lenders don't demand good bank or business credit for approval. Rates can be 7% or higher. Loan amounts range from $25,000 into the millions, often based on your revenues and/or profits as shown on your tax returns. At times, lenders may want other financials, such as profit and loss statements, balance sheets, or income statements. [Looking for a business loan? Check out our reviews and best picks.]
Credit lines
A line of credit (LOC), or credit line, is an agreement between a borrower and a bank or private investor. It establishes the highest loan balance a borrower can access.
As the borrower, you can access funds from the LOC at any time, as long as you don't go over the ceiling set in the agreement. You must also meet any other conditions of the bank or investor, like making timely payments. You must have good credit, a decent amount of time in business and good financials.
You can use your LOC and pay interest on what you use. This is in contrast to loans where you pay interest on the total borrowed. You can reuse credit lines, so run up a balance and pay it off, then use the available credit again.
LOCs are revolving accounts like credit cards. They are also comparable to various other kinds of funding, like installment loans. Often, LOCs are not secured, much like credit cards. There are some secured credit lines, though, which are easier to get.
Lines tend to offer lower rates. According to Bankrate, credit card rates average 13%, while lines average 4%.
What if your personal credit is not good, and you have no guarantor? Build business credit! This makes sense even if you have good personal credit. Business credit helps you get even more money, with no personal guarantee.
Startups at any stage – building business credit
Business credit can save the day for a startup at any stage. It's a great solution if you don't have collateral, good personal credit, a guarantor or cash flow from your business.
Business credit is credit in a business's name. It doesn't connect to the owner's personal credit, not even if the owner is a sole proprietor, or the only employee of the business. Hence, an entrepreneur's business and personal credit scores could be very different.
Business credit helps secure your personal assets. This is even in case of legal action or business bankruptcy. There are two separate credit scores, meaning you can get two different cards from the same merchant. In effect, this doubles your buying power.
Another advantage is you don't need a certain time in business, so startups can do this. For business credit, the scores only hinge on if a business pays its debts on time.
You don't automatically establish business credit. You've got to work to get it. To start, build your company with fundability in mind. Make it harder for credit providers and lenders to find a reason to say no.
Your business's online presence
Lenders and credit providers will search for your business online. It's not good if they can't find it.
Every business needs to be online. Even if you sell nothing online and your clientele isn't net-savvy, you've still got to have an online presence. This means a professional-looking website and email address. You'll need to buy the domain from a web hosting provider.
Business communications
Business phone and fax numbers must have a 411 listing. Your main business phone number should be toll-free. You also need a bank account dedicated to your business and nothing else.
Business licenses
A business must have all licenses necessary for running. This means state licenses, but it can also mean city or even county licenses.
Business ID numbers
Visit the IRS website to get a free EIN (employer identification number). Choose a business entity, such as corporation or LLC. It's best to incorporate; this creates a separate entity, which is rather useful if your business is ever sued. It's your choice whether your business is a C corporation, S corporation or LLC. [Read related article: How to Choose the Best Legal Structure for Your Business]
You should also get a DUNS number from the Dun & Bradstreet website. It's free, although it does take longer than the EIN.
Building and monitoring business credit
Kick off your business credit profile with reporting trade lines. These are credit issuers that give starter credit when a business has none. Get an established credit score before moving on to other kinds of credit.
Monitor your business credit and update the data if it's incorrect or incomplete. Mistakes happen in business credit reports all the time. It can only help your company if you work to fix them.
More options for startups at any stage
Crowdfunding
Would donors feel connected to your product or service? If so, then crowdfunding could work.
A straightforward business might not do so well, but if you go ahead with crowdfunding, here are some quick tips. Your funding pitch will make or break your campaign. Make it as well written, informative and eye-catching as you can. You'll do best by reaching out to bigger investors beforehand. Get them to donate on the first or last days of the campaign. Big donations on the first day get the ball rolling and serve as an impressive reminder to potential donors on the last day.
Federal grants
For urban projects, try HUD grants (the Department of Housing and Urban Development). For rural projects, you can try the U.S. Department of Agriculture. Make sure to follow application requirements to the letter.
State and local grants
Local government also provides grants. You can find a list at GrantWatch, and you can also try your city's and state's websites.
Entrepreneurs who are also veterans can try the Department of Veterans Affairs.
You want to keep 100% of your business – and you can! Startup funding does not have to be challenging, if you know where to look.
* This article was originally published here