This month, I had the pleasure and privilege of speaking at the 4th Annual Xccelerate Business Conference. I gave a talk on “Getting Started: Purposeful Business Creating.” That talk afforded me the opportunity to share my personal story, including steps I took to finally launch Saving Solutions full time.
Following my talk, I made my way to the back of the room to continue networking and to sell copies of my newly released Amazon best-seller, “Desire, Discipline and Determination: Lessons from Bold Thought Leaders.”
While networking, I was struck by the number of aspiring entrepreneurs wanting to self-finance their businesses during the startup phase. Many were looking to turn passions into profits, starting first with small businesses that would allow them to sell products and/or services from the comfort of their homes.
After leaving the conference, I decided to pull together a few simple self-financing options and share via my monthly blog. So, here goes.
1) Leveraging Personal Savings
Leveraging your own personal savings is one of the easiest ways to finance a small business. Whether the money comes from your checking account, money market account, cash settlement or a family inheritance, using your own cash is not only popular but also demonstrates that you have ‘skin in the game.’ That commitment can pay dividends, particularly when looking to grow your business down the road and needing other investors who will believe in your business and your model.
Check out our R.E.A.L.I.S.T.I.C Budget Method for a five-step process for building your budget; creating hundreds in discretionary income on a monthly basis; and earmarking that income for goals such as business startup.
2) Selling Personal Assets
For those that own real estate, stocks, mutual funds, cars that have been paid off, etc., these assets can be sold to raise the cash to fund your business. Exercise caution when using this strategy as there can be tax implications linked to selling certain assets, especially real estate and stocks. Consult your accountant before making this move as there could be unexpected capital gains tax from the IRS.
3) Using Credit Cards as a Temporary Tool
Credit cards can provide a quick, easy and temporary way to finance the purchase of items needed to launch your business. Typically, credit cards come with hefty interest rates for balances that remain unpaid at the end of the month. That said, if you use this strategy, we urge you to pay off the balance at the end of the bill cycle to avoid the interest. Interest rates on unsecured credit cards range from about 13% to 22% for those with fair to good credit. However, if you miss a payment, be prepared to pay interest rates as high as 29%.
By signing up for a ‘Solutions 2 Save blog and mailing list’, you can receive a FREE Budget Companion Tool. That tool contains a tab that allows you to track your credit card payments, outstanding balances (if any), interest, etc.
4) Accessing a Bank Loan
If credit card interest rates are frightening or you feel this isn’t a good option for you, you can also consider applying for a bank loan. This process is not without effort as some banks will require business plans, collateral (such as real estate or a car that has been paid off) and other items from their check list in order to lend you money during business startup.
If a traditional bank doesn’t suit your needs, you can also consider a personal loan. Personal bank loans come with lower interest rates compared to credit cards – currently between 6% and 13%, depending on your credit history.
Lenders such as SoFi are a great resource because they offer personal loans without any fees. Most companies will charge an origination fee but not SoFi. You just pay interest on the loan and you can choose repayment periods of 2-7 years.
5) Borrowing Against Your Home
If you own a home, you can borrow against the equity in the property using a home equity line of credit (HELOC) or home equity loan (HEL). Approaching this strategy will require assessing your home’s value, consulting a lender and perhaps even speaking with your accountant and/or financial advisor. Ultimately, you want to ensure that borrowing against your home doesn’t place you in a bind by adding more monthly debt than you can actually afford.
Many lenders require borrowers to maintain at least a 20% ownership stake in the home – the difference between its value and any mortgages or loans still owed on the property – after the transaction is completed.
Home Value: $500,000
Desired Loan: $50,000
Calculation: In order for you to retain at least a 20% equity stake ($100,000) in the home after the new loan, the total post-loan debt on the house would have to be less than $400,000; subtracting the $50,000 loan from $400,000 means the existing mortgage on the house – prior to the loan – could not be more than $350,000.
With a HEL, you borrow a fixed amount with defined repayment terms under fixed or variable interest rates. There are usually closing fees for HELs.
On the other hand, a HELOC allows you to borrow up to a specified sum as needed, paying interest only on the amount actually borrowed. HELOCs usually don’t have closing fees, though interest rates normally remain adjustable during a fixed period after the money is drawn.