Your Go-to Guide to Raising Capital for Your Small Business

A person sitting in a creative office smiles while thinking about how to raise capital

Real estate, equipment, inventory, technologies, wages, and insurance are some of the many costs you’ll need to cover when starting a new business. Those costs can be substantial, and to a person with limited cash on hand, they can seem insurmountable. Fortunately, there are many ways to raise the capital you need for startup.

In this article, you will learn about the financing options you can use to cover the breadth of those costs.

How can I raise capital for startup?

There are quite a few ways to amass the cash you need to cover your business’s initial costs. These include:

Checking and savings accounts
Many business owners use this pool of cash before considering any other cash sources because it’s the easiest to access and use to fund a new business idea. If you have cash available in either of these kinds of accounts, you should calculate how much you’re willing to part with to start or grow your business. Contact a financial planner for help with these calculations.
Investment accounts
If you own stocks, bonds, or mutual funds in a taxable investment account, you might use them in one of the following ways to raise capital for startup:

  • Sell them. By selling your securities, you may be able to raise all or a portion of the cash you need for your investment. However, sales can result in mutual fund fees, broker commissions, and the realization of capital gains. Be sure to speak with a qualified investment professional before proceeding with this option.
  • Borrow against them. You may also consider a portfolio loan (sometimes called a pledged asset line) to raise the cash you need for your investment. Through a portfolio loan, lenders use your investment savings as collateral and allow you to borrow up to 70 percent of the value of your accounts. Because these loans are backed by collateral, they tend to have low interest rates and are relatively easy to qualify for, provided you can meet the funding minimum your lender requires. You can learn more about portfolio loans in our Small Business Financing 101 guide, What Are Portfolio Loans?.

 

Speak with your financial planner to ensure you understand the tax consequences you may face through the sale of any securities, as well as the risks of borrowing against them.

Personal lines of credit
A line of credit provides access to a predetermined amount of cash that you can borrow and repay according to the terms your lender provides. Many banks will allow you to set up a personal line of credit to use however you see fit, which can include covering the costs of a new business.

 

This option involves some degree of risk: Failure to repay the funds you borrow could negatively impact your personal credit score and prevent you from attaining favorable terms on any loans you need to take out in the future.

 

If you are interested in this form of funding, you should contact a local bank or credit union or work with an online lender.

Retirement plans
If you have been contributing to a retirement savings account, you may be able to use those funds to cover a significant portion of your upfront expenses. There are several ways to access the funds in your retirement savings accounts, but it’s important to note that any use of your retirement savings introduces risk, and in some cases, tax concerns.

 

For more information about using your retirement plan to cover the costs of a new business venture, read our guide, How to Use Your Retirement Account to Fund Your Small Business Startup.

Home equity
If you own a home or other properties, you may be able to borrow the difference between what you owe and what the property is worth. Many lenders offer home equity loans with favorable terms and minimal restrictions on how the funds can be used. The drawback is that these loans require you to put up your house as collateral, meaning that you could lose your home if you fail to repay a home equity loan.

 

Be sure to speak with a financial planner before considering a home equity loan to cover your business’s costs.

Cash-out mortgage refinance
You may consider refinancing a mortgage you have on your home or another property to secure the funds you need to ramp up operations. With a cash-out mortgage refinance, you have the option to pocket the difference between what you owe on a property and 80 to 95% of the property’s full appraised value.

 

Rates and closing costs can be higher with this option than a traditional refinance, so this option should be considered carefully before moving forward. Speak with a financial planner before considering a cash-out mortgage refinance to cover the costs of your startup.

Second mortgage
You may also consider taking out a second mortgage on a property you owe to cover some of your business costs. Second mortgages are structured very similarly to a traditional home mortgage with clear repayment terms and interest requirements.

 

It can be difficult to find a lender who’s willing to provide this type of financing. Most banks view second mortgages as higher-risk investments of their money, so those that offer them charge higher interest rates than they might for a traditional home mortgage. You should speak with a financial planner before considering a second mortgage.

Term loan
Many business owners apply for term loans to cover part of their startup costs. Term loans, which can be attained through a bank, credit union, or online lender, generally have favorable terms and long repayment schedules, but they can be difficult to qualify for, especially for borrowers with less-than-perfect credit.

 

To learn more about term loans and their qualifications, read our guide, Small Business Financing 101: Term Loans.

SBA loan
SBA loans are one of the most commonly used tools to cover early-stage costs. Named after the Small Business Administration that guarantees them, these loans enable small business owners to finance a large portion of their startup costs, working capital expenses, equipment needs, and building acquisition or improvements.

 

The SBA offers three kinds of 7(a) loans to small business owners to cover up to 90 percent of their startup costs, working capital, and equipment needs. They also offer 504 loans for the purchase of existing buildings, the purchase of land or land improvements, the construction of new facilities, the renovation of existing facilities, or the purchase of long-term machinery.

 

To learn more about SBA loans and their requirements, read our guide, Small Business Financing 101: SBA Loans.

Asset-backed financing
Many lenders offer asset-backed loans to small business owners who are willing to leverage their business’s valuable assets. Through these loans, you may finance your business’s inventory, machinery, non-mortgaged real estate, or another tangible asset that has verifiable value to access fast funding.

 

Asset-backed loans are often easy to qualify for and attain, even for borrowers with less-than-perfect credit. To learn more about asset-backed financing, read our guide, Small Business Financing 101: Asset-Backed Financing.

Equipment leasing
Rather than buying and leveraging the equipment your business needs to operate, you may consider leasing large-ticket pieces of equipment. Many equipment wholesalers and distributors offer five-year leases and provide the option for purchasing the equipment at the end of the lease period.

 

You can learn more about this option in our guide, How to Save on the Equipment You Need to Start or Grow Your Small Business. Then, search for a local equipment dealer and inquire about your equipment leasing options.

Commercial mortgage
If a storefront or commercial site is critical for your small business, and you’re interested in buying rather than leasing property, you may want to consider a commercial mortgage. This form of loan can be used to purchase an owner-occupied office building, retail center, warehouse, or other commercial property.

 

Commercial mortgages differ from residential mortgages in both terms and the amortization period. Commercial mortgage terms often range from five to twenty years, and the amortization period extends past the term of the loan. Loans structured this way usually require a borrower to make equal installment payments each month for the life of the loan and a balloon payment as the final payment.

 

These loans may require higher down payments than SBA-backed options, and they can be slightly more difficult to attain. Further, many lenders require borrowers to guarantee the loan, especially if the borrower is an individual or an entity with no borrowing history.

 

Learn more about commercial mortgages in our article, Small Business Financing 101: How Commercial Real Estate Loans Can Help You with Your #LocationGoals.

Commercial bridge loan
A more expensive—but sometimes favorable—option for covering commercial real estate costs and other high-ticket items, including large batches of inventory, renovations, or repairs, is a bridge loan. These loans can often be attained quickly and relatively easily, even for borrowers who have less-than-perfect credit. Because the loans are collateralized, lenders tend to worry less about a borrower’s credit history and credit score, though most will still require a credit check for loan approval.

 

To learn more about this option, read our guide, Should a Commercial Bridge Loan Be Part of Your Financing Strategy?.

Commercial hard money loan
Some non-bank lenders offer commercial hard money loans that are secured by the borrower’s property. This short-term option allows business owners to purchase a commercial property quickly, with flexible terms, and often without checks to the borrower’s credit history. However, the interest rate on these loans is usually high, so many borrowers view these loans as a last resort option and refinance the loan into a mortgage at a later date.

 

Some online lenders offer hard money loans, but most small business owners turn to friends, family members, or local real estate investors to secure this form of funding. Be sure to evaluate the terms of a commercial hard money loan carefully before proceeding with this option.

 

Learn more about this option and other commercial real estate loans in our guide, Small Business Financing 101: How Commercial Real Estate Loans Can Help You with Your #Location Goals.

Partnerships
If you find you can’t raise enough cash through other means or you aren’t comfortable tapping into a significant portion of your savings or equity, you may consider bringing on a partner who can help you cover your initial costs.

 

Similar to the options above, there are risks and benefits to partnership that should be considered carefully before proceeding. For more information about forming a partnership, read our guide, Partnering to Raise the Capital You Need to Start a Business.

Venture capital
You might consider reaching out to venture capitalists or angel investors to attain the money you need to ramp up operations. Some invest in the early stages of a promising startup, but many prefer to see a proven concept before providing the capital its owners need to succeed.

 

To learn more about venture capital and angel investors, read our guides from our Small Business Financing 101 series, Venture Capital and Angel Investors.

How should I proceed?

Work with a qualified financial planner and decide which options make the most sense for you. Your financial planner can connect you with lenders and help you gather the documentation you need to raise capital for startup.

Interested in connecting with a financial planner? Click the button below to get started:

 

What’s next?

Starting a business is a complicated process, but we have articles and advice that can help you with every action you need to take. Log into your owner’s portal for free, personalized guidance that will help you make your venture a success.

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