Working capital is the money used to pay for the day-to-day operations of your start up business, and ensuring that you have an adequate amount available is vital to your success. Ideally, obtaining a start up business loan would be the fastest and easiest way to obtain working capital, but its sometime immpossible for a start up to get approved for a start up business loan. Especially one that is just for working capital (loans that include equipment or real estate can be easier to get approved for since they include a form of collateral). Today, entrepreneurs are using a number of methods to obtain the working capital they need to operate.
Self Funding to Get Working Capital for Start Up Businesses
Many entrepreneurs obtain working capital for their start ups using their own personal money or funds that they personally have access to. Self funding options include:
- Personal savings. Business owners may use their own personal savings to supply their businesses with working capital.
- HELOCs. Home equity lines of credit can be taken out against business owners’ primary residences, provided they have equity available. With these loans, money is drawn when it is needed. As payments are made, the funds become available to borrow again, similarly to a credit card. Using one’s home as collateral to fund a business does carry risk that small business owners need to be aware of before they borrow.
- 401Ks. Tax laws allow business owners to use money from their retirement accounts to buy shares in their start ups in order to fund their businesses. To avoid tax penalties, entrepreneurs should consult a tax lawyer or accountant for assistance structuring the transaction properly.
Start ups are also receiving working capital from a variety of external sources, including:
- Personal Acquaintances. Borrowing money from friends and family members or having them buy into the business as silent partners can provide access to working capital; however, business owners need to carefully consider the impact this could have on their personal relationships. Putting agreements in writing can reduce the risk of arguments arising in the future.
- SBA Loans. Loans backed by the Small Business Administration can be used to obtain the working capital needed to get a small business off the ground or to continue operations. There are a strict set of guidelines that dictates who can and cannot qualify for these loans.
- Venture Capital. Venture capitals firms will buy into start ups in exchange for a portion of their equity. Competition for funding from venture capital firms is great, so entrepreneurs must be able to sell their businesses well and prove that they have the potential to grow.
- Crowdfunding. Crowdfunding is the process of obtaining funds directly from the public through one of several Internet platforms. People contribute money toward a campaign goal in exchange for rewards like merchandise. Business owners must have engaging campaign videos and descriptions and the ability to market well on social media to succeed with crowdfunding.
- Vendor Financing. Start ups can often finance the cost of raw materials or inventory from their vendors. Interest rates are likely to be high initially, but many businesses are able to obtain vendor financing even when they are unable to obtain other types of external funds.
Most start ups receive funding for working capital through multiple means, not just one. Combinations of self funding and external funding are most common for today’s start-ups.