Starting a business is an exciting and fulfilling endeavor that can allow entrepreneurs to chart their course career-wise. In fact, the World Economic Forum notes that many of the youngest people entering the economy have to bypass the traditional labor market by creating startups and developing innovative products and services that can drive the global economy forward.
However, as many aspiring business owners know, putting together the necessary funding to get your business off the ground can be one of the most challenging aspects of starting a business. To this end, this article will explore some of the different ways you can finance your first business:
1. Personal Loans
One traditional way to finance a new business is through a personal loan. Unlike other forms of funding, such as credit cards, personal loans provide you with a cash flow that you can use to purchase equipment or stocks. But, lenders have specific requirements they need to examine before approving your loan. A guide on personal loan eligibility by Sound Dollar explains that they often look at borrowers’ credit scores and debt-to-income (DTI) ratio to assess eligibility. Cautious lenders prefer to see a credit score of at least 750 or a DTI ratio below 36% before approving an application. Despite these requirements, working toward having a good application is worth it for the flexibility, low interest rates, and liquidity that personal loans can provide young entrepreneurs. But if you have a less than ideal credit score, whether it may be due to lack of credit history or bad financial decisions in the past, there is still a loan option available for you to kickstart your business journey as some lenders also offer loans that do not require a credit check. Eligibility requirements may differ per lender so it is ideal to compare all the options available.
Crowdfunding is a popular method for entrepreneurs to raise funds for their first business. It allows individuals to contribute small amounts of money to a venture in exchange for rewards. In recent years, this approach has become increasingly popular with the rise of online platforms such as Kickstarter, GoFundMe, and Indiegogo. For example, a fashion designer can use a crowdfunding platform to raise money to produce a new clothing line and, in exchange, offer rewards such as early access to the product, exclusive merchandise, or even the opportunity to be a part of the creative process. With the help of a large number of small contributions, crowdfunding can help you raise the funds you need to turn your ideas into reality.
3. Angel Investors
Angel investors are high-net-worth individuals who provide capital to small companies. Their funding can range from tens of thousands to a few million dollars. In return, the angel investor will take a percentage of ownership in the company, usually between 5% to 20%. To get into this kind of financing, small businesses can look into AngelList, a platform that connects startups with angel investors and jobseekers. Angel List was founded by Naval Ravikant, a venture capitalist and entrepreneur whose personal advocacy is to help young entrepreneurs navigate the financial challenges of starting a business and increase their chances of success.
4. Personal Savings
Personal savings can be a good financing option for your first business. For example, a young chef who has been saving money for several years through restaurant jobs may decide to use that money to start their first food business. Using personal savings can give you greater control as an entrepreneur since you are not beholden to other stakeholders. Plus, by using your own money, you can secure additional funding in the future by demonstrating to investors that you are committed to the success of your business. If you believe this can be a practical option to finance your first venture, our post “Six Unique Ways To Save Money” offers some pragmatic advice on stashing cash and building wealth, such as trading goods and services or micro-investing.
Starting a new business venture is an exciting and challenging endeavor that requires significant time and money. With a solid plan, a clear vision, and a comprehensive understanding of the available financing options, you’ll be well on your way to success.