You have a vision, a business idea that you, more than anyone else, are perfectly suited to execute. Now, there’s just the little matter of finding the funding you need to bring your startup to life.
This scenario is true for many startups all across the country, and while the need is great, the available funding source solutions are plentiful. Here are a few you may want to consider.
Consider funding options you already possess
Before we delve into outside funding options you may consider, let’s first take a look at potential funding options you already have inside your portfolio. Personal savings are a core funding source for many startups; however, they are not your only existing financial resource when it comes to your start-up. Your retirement plan can be a powerful tool as well.
If you already save for your retirement through an IRA, you can potentially use that funding to invest in your startup. Savvy investors follow this strategy on a daily basis, but many other people don’t realize that their retirement account can help them today as opposed to only in the future.
However, it’s important to note that you are prohibited from personally benefiting from your IRA, and if you are purchasing ownership of an existing entity, you cannot purchase more than 50 percent of that entity. In addition, IRC 4975 prohibits any investments where the managing member owns more than a 10-percent interest and is a disqualified individual. You can learn more about these and other investing considerations here.
And if your retirement account is a solo 401(k), the IRS allows you to use as much as $50,000 from that account to start or invest in a new business, provided you are leaving your current job.
If you choose to pursue a solo 401(k) loan, allowable under Internal Revenue Code Section 72(p), you will essentially use your 401(k) as collateral on the loan. The loan must be repaid in five years or less with a payment structure of quarterly payments at minimum. Interest rates are generally set at the prime interest rate, but this isn’t always a guarantee, so you should inquire to find out.
Making your payments on time will protect you from any penalties or taxes tied to this loan option.
Bank loans
Aside from personal financing, the traditional bank loan is usually the most commonly sought funding measure. Acquiring a bank loan will require you to convince the lender of the feasibility of your business proposal as well as your overall financial health. Banks want to know that if the business fails, you will still be able to repay the loan.
If securing a bank loan, consider whether a fixed or variable interest rate loan is right for you — recognizing that a variable interest loan’s rate could increase at the worst time. However, a bank loan may allow you to maintain sole ownership of the business — and its profits — while also protecting you against the idea of seeking investors who may eventually want a say in how you run the business.
Loans from other investors’ retirement accounts
The funding for your new business need not only come from your retirement account, it can come from the retirement accounts of other investors as well. These loans operate similar to the strategy of using your own retirement account and, as such, your investors will be unable to lend money to you if you have been deemed a disqualified individual.
Their loans can also be secured by an asset, such as personal property, but this asset cannot be collectible and any interest or repayment on the loan must be returned to their account.
You can find a complete set of rules from the IRS regarding this opportunity at irs.gov.
Business credit cards
Like personal credit cards, business credit cards give you the freedom you need to make purchases complete with rewards, track spending by your employees, and get other perks. You can also enjoy up to two months interest-free, provided you are paying your bills on time. However, like consumer credit cards, those bills can swell quickly if you’re paying your bills late.
The value of individual business card plans will vary based on upfront costs, additional fees, and overall value provided. That’s why it’s important to thoroughly research your options and pay special attention to how those costs shift based on the number of cardholders you have. The size of your business could naturally determine which cards will or won’t work for your startup.
Vendor credit solutions
We’d be remiss if we didn’t follow our business credit card section with the vendor credit option. Vendor credit is generally tied to the purchase of raw materials, equipment or other supplies. Vendor credit solutions often provide you “net-30 terms” meaning you will have 30 days to provide payment on any invoice. Some suppliers may even extend this to 60, 90, or even 120 days.
Obtaining vendor credit may include interest or require an additional fee. You may also be able to actually reduce your bill if you pay it off promptly. And even if you don’t have access to such a perk, your business credit will benefit from paying off your bills in a timely manner.
(Related: Ways Small Business Owners Can Cut Expenses and Save on Taxes)
Crowdfunding
If your startup is one you’re sure people will love, crowdfunding is a great way to finance the idea. There are many different crowdfunding solutions in the market, allowing you to pick a channel that is best suited to your startup’s structure.
These are just a few of the possible crowdfunding solutions you could pursue. Do your homework and choose a solution that matches your goals.
- GoFundMe if you’re seeking donor submissions.
- Kickstarter or IndieGoGo if you have rewards to offer.
- Kiva if you plan to pay back the financing people loan you.
- WeFunder if you want to raise money from investors.
Government grants or subsidies
The competition can be fierce and the rules and by-laws considerable, but a government grant or subsidy can be a viable funding source for your business. Local governments in particular want to fund companies that are starting in their area as it benefits the entire local economy.
Just remember that in many cases these funding streams require you to match the total government funding you receive with an equal amount of private investment. As such, review your options beforehand and make sure you have other funding sources in place should a match be required.
Get your startup going
With so many funding options available, the solution exists to help you bring your startup to life. Which one — or more — you choose depends on your situation and circumstances.
If you have any questions about funding your start-up with your retirement plan, we’re always here to help. Contact us or visit trustetc.com/businesses today.
