But skill, dedication and perseverance are seldom enough to guarantee the viability of a small business. In order to dip your feet in the turgid waters of commerce, you will probably have to pay start-up costs.
What Are Startup Costs?
Startup costs encompass all the expenses that go hand in hand with founding a new business or purchasing a previously established one. They vary depending on the nature and location of the business, but they often include:
- Filing fees
- Website design
Startup costs are rarely small. Starting a restaurant can cost anywhere between $175,000 and $750,000. A new roofing company’s average startup cost is lower yet still significant at $50,000. Even a modest “microbusiness” costs an average of $3,000 to get off the ground.
Fortunately, America is still a land of opportunity. If you haven’t got a wealthy father to give you a small loan of $1 million, there are still several ways to achieve your dreams of entrepreneurship! Here are some of the methods for financing startup costs for a small business.
Many credit cards are specifically designed for financing a new business. They provide revolving credit, as well as cash back or points that will effectively lower your actual startup costs. Even if you don’t use a credit card to finance a small business’s startup costs, it can prove extremely helpful to keeping your business and personal expenses separate from one another.
Just as it would with a personal credit card, your credit score determines your chances of getting approved and receiving a good interest rate for a business card. That’s why taking steps to improve your credit score before startup can have long-term positive ramifications for your business.
Do take care before you commit to financing startup costs with a credit card. A business loan with more favorable terms is almost certainly available, and a cash advance will come with a higher interest rate than normal credit card debt.
When you pull yourself up by your own bootstraps, you’re getting along without help from anyone else. If you currently have sufficient savings to bankroll your own startup costs, then you can put yourself at an enormous advantage by avoiding debt altogether. Even if you can only finance part of your new business’s startup costs, you will still look forward to lower interest payments – a boon if your business will have a negative cash flow early on.
If you do decide to go the bootstrapping route, make certain you have enough extra funds (or credit) to cover unexpected expenses. You would be well advised to still have some sort of savings left over in the event that your business fails. You can also remove some of the burden from yourself by asking friends and family for financing. They will charge lower interest than a financial institution (if they charge any at all).
An angel investor may be available to finance startup costs in exchange for partial ownership of your company. On the plus side, an angel investor’s loan will not require interest payments. They will only expect you to work your hardest, which you no doubt have every intention of doing already.
On the down side, working with an angel investor means you must relinquish full control over your company. Furthermore, if your business becomes enormously successful, then the angel investor will continue to own whichever percentage you agreed upon from the onset. What started as an investment of tens of thousands of dollars could potentially become worth millions to your angel investor!
The Small Business Administration (SBA) microloan program provides loans of up to $50,000 to Americans who wish to found small businesses. These microloans are normally available through intermediary lenders: community-based organizations that evaluate business plans and identify eligible borrowers.
SBA microloans are often the best option for smaller businesses that have proportionately smaller startup costs. Their interest rates are typically lower than those offered by private lenders, which is of enormous advantage during a small business’s formative months.
Business loans are more versatile than SBA microloans. A business loan can cover the costs of acquisition, development, improvement and equipment even if a business is already established. And although a business loan is commonly paid back over a long span of time, that actually works to many small businesses’ advantage.
Note that a business line of credit can serve the same purpose as a business loan. Instead of providing a large sum of money upfront that you must gradually pay back with interest, a business line of credit functions similarly to a normal credit card: the business owner draws on their credit line as needed while making regular monthly payments. Yet while it may provide greater day-to-day flexibility, a business line of credit often can’t supply sufficient funding to cover all of a new business’s startup costs.
Business loans and business lines of credit characteristically carry more risk for the lender. Entrepreneurs with lower credit scores may explore online loans because they often offer lower interest rates than traditional lenders. Take care if you go this route, as online scammers frequently promise suspiciously low rates in order to entice their victims.
If you would like to take the most cautious approach to financing a new business’s startup costs, then we welcome you to contact Sherburne State Bank or visit one of our locations in Becker, Monticello or Princeton, MN in person today. In addition to business loans and lines of credit, we offer the mobile banking and expertise you’ll need in order to ensure your best chance of success with your new venture!