Are you planning to become a business owner but don't know how to fund your small business? Many people are in this position and need helpful advice on the best ways of financing their LLC.
In this blog post, our topic will be all the different ways you can fund your LLC. We'll discuss the advantages and disadvantages of each approach.
After reading the article, you'll be able to decide which is suitable for your company!
Decide How Much Money You Will Need
When thinking about starting an LLC, most business owners begin their journey by thinking about how much money will be needed and where they can find it.
The amount depends on your financial situation and the main idea of your business.
One way to fund a small business is by self-funding it with personal assets. You will be using your own assets, money, savings, and other liquid assets to get the business started.
There can be some risk connected with this approach - if the business fails, you may lose some or all your assets.
However, if it is successful, you will have complete control over the company and no outside investors to answer to.
You can reduce the risk of self-funding by making regular payments back to yourself from the business profits. That way, you will ensure that you don't lose everything if things go wrong.
It also gives you a steady income stream from the business. It can be helpful if you are also funding it from personal funds. It can also be less risky than borrowing money from friends or family members.
2. Rollovers as Business Startups (ROBS)
ROBS is a type of alternative business financing that allows you to use retirement money to establish, acquire, or grow a company.
ROBS are not retirement accounts like 401(k) loans or early payouts. ROBS is not a loan or a retirement fund withdrawal.
Instead of worrying about debt and interest payments, ROBS allows you to invest your own retirement assets in the growth of your company.
However, if your company fails, you run the danger of losing your retirement assets.
Another way to fund a limited liability company is through crowdfunding. Crowdfunding involves asking people online(on sites like Kickstarter or Indiegogo) for donations.
You are asking for donations from the crowd in exchange for a reward. It can be a great way to quickly get your small business off the ground. You will already have some money coming in even before launching your campaign.
There are a few things to have in mind when crowdfunding:
- You'll need an innovative marketing approach to have people donate money to you.
- You may not be able to raise as much money as you want through crowdfunding.
- It can take time for the money raised through crowdfunding to reach you. You'll be able to withdraw it once your campaign is over. Depending on the website and how long your fundraising time is, this could take weeks or even months.
Crowdfunding is an excellent option for funding your business if no other funding options are available to you.
4. Informal Loans From Personal Network
Your friends or family members could also lend money to you for your LLC. It is called an informal personal loan, and it can be a great way to get started quickly.
There are a few things to have in mind when borrowing money from people you know:
- The loan should be in writing, even if it is an informal agreement. It will help protect both you and the lender in case of a dispute.
- Make sure that you repay the loan on time - otherwise, you may damage your relationship with the lender.
- You might need to pay interest on the loan, even if it is an informal agreement.
Informal personal loans can be a great way of getting started with your business. Make sure that you have all the details about the terms in writing before you start borrowing money!
5. Grants and Local Government Programs
State and local governments may offer special grants or loan programs for new businesses. These can be a great way to get started with your business without having to invest any of your own money.
You will receive free startup funds from the government that you do not have to repay, as it is not a loan!
You might need to meet specific qualifications before you are eligible for these programs. Make sure to do your research.
Governments give grants for a specified purpose or to specific groups of people. There are awards for small businesses led by women, minorities, immigrants, military veterans, and even felons.
The downside of government grants is that there is usually a lot of competition for them. You will need to have a good business plan and present it well to stand out from the other applicants.
Mike Maynard, managing director and CEO of a marketing agency for B2B companies called the Napier Group, advises to treat your business plan as a living document rather than just a paper that sits on a shelf.
It should contain your vision, goals, strategies you’ll use, and some of the challenges you’ll have to overcome.
6. Venture Capital
A fifth option for funding your business is through venture capital. Venture capitalists invest in new companies to help them get started and thrive.
They will want a part of the profits from your business or equity in it in exchange.
Venture capitalist investment can be a great option if you have a solid business plan. You should be confident that your company will succeed.
They can provide funding, advice, and mentorship to help your business flourish.
7. Traditional Loan Institutions
The final option for funding your LLC is through traditional lending institutions. For example, banks and credit unions. These lenders will usually want to see a solid business plan.
From a small business owner, banks and credit unions might request collateral before they agree to give a business loan for an LLC.
Putting your car or your home as collateral can increase your chances of getting a loan. Bear in mind that failure to repay your loan might result in the loss of the asset.
There is also an option of requesting a home equity loan if you have equity on your home.
Depending on the amount of money you are applying for and your credit score. It can take time to get a business loan from traditional lenders.
8. Credit Card Loans
Many people may try to start their small businesses with personal credit cards. The founders of Google did just that.
Many credit card companies offer business credit cards with low or no annual fees and interest rates. Some companies also offer travel benefits and cashback on business expenditures.
Credit cards give you immediate credit without applying for a loan and all the paperwork.
Because the interest can be high, new business owners should look at credit cards as short-term financial aid. Financial aid that they should pay back as soon as possible.
9. Adding Members to the Team
Adding more members to your team could be another way to fund your startup. Even if you wish to go at it alone, adding LLC members is worth considering.
Putting your financial resources together will help your new startup.
You also expand your LLC's social network of business contacts. It is also a great way to find future investors.
10. Peer-to-Peer Lending Sites
Peer-to-peer (P2P) or social lending websites have emerged on the Internet in recent years.
Eligible businesses can use these peer-to-peer portals to get individual or institutional investors' financing.
These services let you apply for a loan online. Investors with site accounts have the option of funding their future business with interest-based loans.
These (P2P) lending sites are online alternatives to traditional lending institutions. It is predicted that they will grow at a similar rate.
What Are Capital Contributions to an LLC?
A capital contribution is a phrase used to describe an LLC member's participation in the company.
When forming an LLC, each member will pay an initial financial subsidy. There are no least amounts for this initial capital contribution.
It should be enough to meet the startup's initial operational expenditures.
How to Apply for an LLC Loan?
Finding a commercial lender is the first step in the process. These businesses operate by only lending money to businesses.
Once you've found a commercial lender to work with, inquire about their various lending programs.
You may be required to talk with a loan officer about your business program as part of the procedure.
The commercial lender may look at your LLC's credit or your credit, depending on how well-established it is. A commercial lender will want you to fill out a loan application.
Where Can I Find Funding for My Business?
You can get capital for your business from many sources. Consider your resources as potential sources of financing.
Those can be personal savings, credit cards, personal loans, retirement accounts, and home equity.
You can apply for small company grants or pre-sell or crowdfund your concept to raise initial funding.
Other options are small business loans, selling stock in your firm, angel investors, venture capital, or selling shares in your enterprise.
The business is not just about the idea but also how you can finance it. With this in mind, there are many ways that a person can fund their startup.
Personal savings, family help, and formal financing institutions are all possible options for someone starting a business.
Jared Weitz, CEO of United Capital Source, also reminds us to consider other factors when choosing a financing option — such as loan type and terms, your business finances, collateral requirements, and loan fees — as they will all determine the cost and feasibility of your financing choice.
We hope these recommendations will be helpful as you think about financing your startup. What do you think? Which of these methods would be most effective in your situation?