When you were eight years old, you launched a highly profitable lemonade stand in your front yard. With nothing but a packet of instant drink mix, a crudely drawn sign and a winning smile, you grossed a whopping $2.35 in just an hour and 15 minutes. If only all new businesses were that easy.
According to the Global Entrepreneurship Monitor, a research group, the average cost of starting a new business in the United States in 2005 was $70,000 [source: Consumer Reports]. In a 2004 survey of failed businesses, 79 percent of respondents said that “starting out with too little money” was a major cause of their collapse [source: Sugars].
But how do you finance a new business? When you were eight, you could borrow the drink mix from mom. But now that you’re grown up, will she let you borrow her life savings?
Luckily, you’re not the first entrepreneur to start with nothing but a good idea. Keep reading to learn about 10 effective and creative ways to raise start-up capital for your new business.
On average, 68 percent of start-up financing comes directly from the pocket of the business owner [source: Consumer Reports]. Even if you don’t have a lot of liquid assets in checking accounts, savings accounts or money market accounts, there are other ways to leverage your assets to finance a new business.
The first way is to sell high-price items that you simply don’t need. Auction off grandma’s jewelry and antiques, sell the car and lease a new one or downsize to a smaller home.
If you own your home, then consider a home equity loan or a home equity line of credit. Be very careful, though. With a home equity loan, you’ll need to make additional monthly payments on top of your mortgage.
Many people don’t realize that they can borrow money from their 401(k) or IRA savings accounts. With a 401(k), you can usually borrow up to $50,000 of your savings as long as it’s paid back, with interest, in less than five years [source: Smart Money]. With IRAs, you can borrow a chunk of money, interest free, for a period of 60 days.
First of all, money from an angel investor is not a loan
Be warned, though, if you don’t pay back these loans in time, you’ll be charged income tax plus a 10 percent early withdrawal fee [source: Entrepreneur].
If you have a whole life insurance policy, you can also borrow up to 90 percent of the cash value of your account at a relatively low interest rate.
And if you fail to make those payments, the bank could take your house
Angel investors are successful businesspeople who dig into their deep pockets to finance new businesses with high growth potential. If you’re low on start-up capital, an angel investor can truly seem “heaven sent,” but it’s important to read the fine print.
It’s an equity investment. An equity investment buys the investor a share in the ownership of the company [source: FindLaw].
So if you accept money from an angel investor, you’re also giving up partial control of your new business. An angel investor will ask for at least a 10 percent stake in your business, but could go as high as 50 percent for a riskier start-up [source: Entrepreneur].
For many small business owners, it’s difficult to cede authority to an outside investor, so think hard before attaching strings to your money. On the bright side, since angel investors don’t give loans, there are no regular payments with interest to worry about. As partial owners, however, they’ll take a chunk of your profits.