Funding a startup can require thinking outside the box. Often you’ll need to utilize more than one source of financing to get your new business off the ground. Should you take out startup business loans? Raise money? Use your savings? We’ll discuss everything from SBA loans to angel investors to Rollovers for Business Startups (ROBS).
A ROBS might be the best kept secret in startup funding. They enable you to access your retirement savings to fund your business without the normal early withdrawal penalties and taxes.
Each startup business loan option falls into one of three categories: using your own assets, traditional borrowing, or fundraising from friends, family, or investors. We’ll go into more detail about each one below, providing an overview, the typical costs, and a summary of each option.
Here are the 11 best startup business loan options:
1. Rollover for Business Startups – ROBS
Rollover As Business Startups (ROBS) allow you to invest funds from your retirement account into your new business without paying early withdrawal penalties or income taxes. However, a ROBS is not a loan against your retirement account. It is also not a way of cashing out your retirement account. There are no loan payments, and the business takes on no debt.
Around $5,000 in setup fees and ~$1,500/annually in monitoring fees.
A ROBS is a way to use your 401k or IRA to fund your business. With the right professional help, you can tap into your retirement accounts to fund your new business without incurring any early withdrawal penalties or taxes. Essentially, you’re buying stock in your company with funds from your 401K / IRA and holding that stock inside your retirement account.
To make use of a Rollover for Business Startups (ROBS) your company must be set up as a “C” corporation. If your company is successful and starts making payments to shareholders, your 401K would receive a portion of those funds based on its ownership percentage.
You must also be a legitimate employee of your business. There is no set standard for what this means, but a conservative approach is that you work in the business for 1,000 hours annually. That makes a ROBS ideal for actively managed businesses, but not necessarily a good option for people pursuing absentee businesses like some real estate investment companies.
Additionally, a ROBS is flexible and can be used in conjunction with almost every startup funding option on this list. The funds from a ROBS can even serve as a downpayment for a startup business loan or an SBA loan. You can learn more in our Ultimate Guide to ROBS Financing.
2. Small Business Credit Cards
Both Personal and Business credit cards can be a relatively cost effective way of financing your startup. Many come with 0% APR introductory periods and valuable cashback or rewards programs. This can be a good savings for your business if you use credit cards regularly.
16% Average Annual Interest Rate + Annual fee of $50-$100 fee for some cards
Small business credit cards aren’t an ideal way to fund large capital investments in your small business startup, but they can be an essential tool for cash flow management. You can cover expenses with your small business credit card while waiting for payments from your customers, preserving cash and earning rewards at the same time. The National Small Business Association found that 37% of small businesses used credit cards to finance their business operations.
Benefits of a Small Business Credit Card:
- Many credit cards offer promotional introductory rates of 0%.
- Only pay interest on the balance you’re carrying at the end of the billing cycle.
- Cashback and rewards programs let you earn money for your business just by charging purchases to your card.
- Employee cards that allow you to restrict what the card can be used for (gas, office supplies, etc.) mean more independence for trusted employees, less busy-work approving purchases for you, and more rewards or cashback.
With APRs that typically range from 10 – 30%, credit cards are a very affordable means of short term borrowing for small businesses. Their one downside is that they’re particularly sensitive to your credit score, and if your score is damaged the credit limit can be lowered or the credit line closed.
3. Home Equity Line of Credit (HEL, HELOC)
If you’re a homeowner with some equity in your home, you may be able to get a low-rate home equity loan (HEL) or home equity line of credit (HELOC) to fund your startup. A HEL gives you a lump sum immediately, while a HELOC can be drawn against as you need funds. With a HELOC you pay interest only on the balance you currently owe.
2-5% in closing costs + 3-6% annual interest rate. Interest rates and upfront costs are generally lower for HELOCs compared to HELs.
In order to get a HEL or HELOC, you typically need to have 20%+ equity in your home. A HEL gives you a lump sum, which acts like a second mortgage, and a HELOC works like a line of credit, that works like a credit card. Let’s take a look below at who each option might be right for.
Lump sum (HEL)
A HEL might be right for you if you need a large amount of money for up front businesses expenses that are essential to your business. You’ll immediately be making payments on the full loan.
Line of credit (HELOC)
If you do not have an immediate use for all of the funds right away, then a HELOC may save you on interest. With a HELOC, you can draw funds as you need them and you only have to pay interest on your current balance, which can save you a lot of money.
While a HEL or HELOC can provide your startup business with capital at a lower interest rate than many other kinds of startup financing, keep in mind that each will use your home as collateral. This reduces the ways you could collateralize other potential loans in the future.