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As exciting as it is, starting a small business can get expensive. According to our annual Small Business Trends survey, 64 percent of small business owners spent up to $100,000 to acquire their dream business. Not many people have access to large amounts of cash to finance those kinds of purchases. That’s why financing options abound to help aspiring small business owners gather funds – however, even many of those options require a down payment of some sort.

There are plenty of alternative ways to raise money for a business, starting with implementing a savings plan and expanding to government grants or seeking investors. Let’s investigate a few of the most popular ways to raise money for a business.

How to Save Money for a Business

If you’ve ever thought about starting or buying a small business, one of the first steps to take is to start saving money as early as you can. There are several tips you can use to make setting aside funds easier, like automatic withdrawals into a savings account and paying off high-interest debt early to save what you’d spend on payments. But perhaps most important is to write a budget and stick to it. Make note of your regular housing and utility costs as well as costs like grocery bills and other necessities. Then, set a limit for what you can spend in each category each month. You may find it easier to curtail your spending by using a cash-only approach instead of credit or debit cards.

How to Raise Money for a Business Without a Loan

If savings alone won’t get you the amount of capital you need (and for many, it won’t), it’s time to start looking at other ways to raise money for your business. A number of small business loans exist. But, if you’re looking to avoid debt or consider it a last resort, there are methods you can use to raise money without a loan.

Rollovers for Business Start-ups

For many, a retirement fund is their most well-stocked savings account, but not viable as business capital due to the hefty fines and tax penalties associated with early withdrawals. But with Rollovers for Business Start-ups (ROBS), also known as 401(k) business financing, you can tap into your 401(k), IRA, or other rollable retirement accounts to use as business capital – without incurring tax penalties or fees. It’s not a loan, so there aren’t interest rates to worry about, and the only (recommended) eligibility criteria is having at least $50,000 in a rollable retirement account.

graphic visualizing the rollover for business start-ups process

Here’s how it works: you start a C corporation that sponsors a new 401(k) plan. You then roll funds from your existing retirement account into the new 401(k) without triggering any tax penalties. The new 401(k) plan uses those funds to purchase shares of the C corp. The corporation, now cash-rich, then uses the proceeds to start or buy a small business. Your retirement fund becomes an investor in your small business.

Learn more about Rollovers for Business Start-ups in our complete guide and find out if it’s right for you.

Crowdfunding for Small Business

Crowdfunding is also an option to raise money for a small business, allowing the public to invest in your company in return for perks, future repayment, or equity. There are a multitude of crowdfunding sites that offer visibility to a large audience and have low fees, varying depending on how you reward your supporters.

  • Equity crowdfunding. Businesses sell equity in their company in return for money. This option is usually best for existing companies that can grow and scale quickly.
    Example of equity crowdfunding sites: Crowdfunder
  • Debt crowdfunding. This model works similarly to traditional loans, but rather than owing money to a financial institution, you repay individual investors at a predetermined annual percentage rate (APR). Best for businesses with strong revenue and credit histories.
    Example of debt crowdfunding sites: LendingClub
  • Rewards crowdfunding. This is a popular method crowdfunding for businesses that sell physical products. In return for money, the business offers investors rewards, such as free products or other perks.
    Examples of rewards crowdfunding sites: Kickstarter, Indigogo
  • Donation crowdfunding. While difficult to obtain, donation crowdfunding doesn’t require a business to pay its investors. It’s ideal for businesses that can rally support from their communities to help them raise funds.
    Example of donation crowdfunding sites: GoFundMe

Government Grants for Small Business

The federal government is among the largest distributor of funds for small businesses and has a multitude of grants available to eligible small businesses. Because you’re working with a federal agency, the application process can seem daunting for government grants, but it can be worth it in terms of dollar amounts offered. The government usually only offers grants for science and research businesses, nonprofits, educational institutions, and state and local governments, but opportunities also exist for business owners who are veterans, innovative technological businesses, and companies that plan to export goods.

Visit the Small Business Administration (SBA) to learn more about available grants and eligibility requirements.


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Finding Investors for Small Business

Finding investors can be a great way to raise money for your business while also raising awareness about your products or services. Business investors are individuals (or other businesses) that believe in your venture enough to give you money upfront that is later repaid (usually with interest). Many platforms exist to help you find investors, from the crowdfunding sites listed above to channels created specifically for businesses to find investors, such as startup launch platforms or even local business incubator programs.

  • Investor platforms. Sites like Fundable offer an easy way for small businesses to connect with investors without ever leaving their home. Simply enter information about your business and how much capital you’ll need, and investors from around the country will be able to find you.
  • Business incubators and accelerators. These programs not only offer physical office space to business owners but also a way to meet investors who can provide funds as well as provide advice on the best way to launch and grow a business. Check out the International Business Innovation Association to find a local chapter near you.
  • Angel investors. Like business incubators, angel investors are individuals (or firms) who not only offer funds to help small businesses launch, but also provide guidance on business matters and will introduce owners to their network for further support. Funded.com and the Angel Investment Network both offer platforms for investors to post about the opportunities they’re seeking so businesses that fit their criteria can approach them.
  • Friends and family. Don’t forget to call on your personal support system for financial support, if you feel comfortable doing so. While borrowing money from friends and family can be tricky, you may find they’ll be willing to gift money for your business with no strings attached.

How do investors get paid back?

If you receive funding from an investor and didn’t offer them permanent equity in your company, chances are you’ll need to repay them. There are a few ways small businesses can repay investors, either by making monthly installment payments with interest tacked on or paying a certain percentage of your profits each month until the total amount is reached. It’s important to decide on these terms before taking money from any investor and including the details in your contract to ensure neither party loses out.

Government Loans for Small Business

If you still need additional funds after using the above methods to raise money for your business, the federal government offers loans specifically for small businesses from the SBA. These loans are backed by the federal government, meaning that if a business owner defaults on the loan, the government reimburses banks for up to 85 percent of the remaining loan amount. This makes lending to small businesses less risky to banks. In addition, SBA loans also boast low interest rates and long repayment terms, making them attractive to business owners as opposed to other, higher interest business loans. It’s important to note that applying for an SBA loan can be cumbersome, taking up to several months, and approval is contingent upon the business owner’s ability to provide a 20 – 30 percent down payment, which is why it’s so important to start saving for your business as early as you can.

Learn more about SBA business loans and how to apply in our complete guide.

Securing financing for a small business is one of the most common challenges faced by business owners but thankfully, plenty of options exist if you know where to look. Start by saving your own funds, and when you’re ready, start researching other ways to raise money for your business. And remember, Guidant Financial is here to help every step of the way, from supporting you in finding the right business to securing financing. Contact us today to get started.

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