Are you thinking about starting a business but are unsure of where or how to get the money you need? You are not alone! Starting a new business can be very exciting, but getting funding is a challenge many faces.
For starters, one challenge can be understanding the different terms and types of funding necessary to start and operate a business. Let’s discuss the difference between working capital and startup capital. Startup capital is the money required to create a new business. It can include:
Money to pay for starting inventory
Renting or buying a business location
Permits and licenses
Basically, anything you spend money on for a new business before it opens. Working capital is the money needed for the day-to-day operations of your business once it is open. A working capital loan for a new business can be used to pay for things like:
Paying rent or a mortgage
This guide will focus on working capital for a newly opened business rather than startup capital, but in many cases, the same considerations will apply to both.
There are a variety of ways new businesses can access sources of working capital, including using personal funds, professional investors (like venture capitalists or angel investors), business loans, business credit cards, lines of credit, and alternative funding. Let’s look at some of these in more detail and consider the pros and cons of each.
Personal funds can be money a business owner has in their savings accounts or a loan using their assets as collateral. Some new business owners will take out a second mortgage on their home or borrow from their retirement account. Asking for a working capital loan from friends or family can be another form of personal funding for a new business, depending on the capital requirements for the small business.
The pros of using these types of funds as new business working capital are that they do not require proof of business success or a minimum amount of time in business, unlike many other forms of funding. The cons are that they put the new business owner at higher risk of losing personal money and can cause more upset in relationships. It is important to note that some forms of personal loans are required to be used for specific purposes, and it can be illegal to use personal funding for a business if that is restricted by the terms of a loan.
Professional investors, such as venture capitalists or angel investors, are generally high-net-worth individuals or groups that invest in businesses they see as likely to give a high return on investment. These types of investors generally offer help in exchange for a share of the business, or partial ownership, and sometimes choose to be involved in some aspect of running the business.
A pro of using professional investors is that they are often willing to assist new businesses without a proven track record and sometimes offer additional assistance beyond just financial. The cons are that they may request terms of repayment or company owners that are not desirable to the business owner, and will only choose to invest in companies they see the potential.
Business loans come from banks or financial institutions and are designed specifically for businesses. There are many types of working capital loans available, such as equipment loans, invoice financing, startup loans, and working capital loans. They will have a specific repayment schedule with due dates and an interest rate.
A pro of getting a business loan is that it is tailored to the needs of the business and can provide the specific amount of capital needed. The cons are that they often require proof of long-term business success (which isn’t possible for new businesses), have a longer repayment schedule (typically three to 10 years), and can take weeks or even months to get the cash needed.
Alternative funding is getting capital for your business outside a traditional bank loan. Financial institutions like Backd can provide working capital financing for new businesses without the cons associated with traditional bank loans.
The pros of Backd financial solutions include:
Getting working capital fast, in as little as one day
Shorter terms for payback, from four to 14 months
Flexible lending amounts, from $20K to $2M
More options for newer businesses, only require one year in business and 10 months of business bank statements
The documents required for a working capital loan vary by lender. Still, most traditional banks will require the following information, according to Forbes:
Completed loan application
Disclosure of existing business loans
At least 12 months of personal and business bank statements
Tax returns for at least two years
Detailed business plans
Proof of identity
Proof of business ownership
Record of sales tax payment
High credit score for personal and business credit
Alternative funding options may have different requirements. At Backd, our requirements for business funding are:
Completed application, which can be done in many cases in just a few minutes
Proof of business operation for at least one year
Personal credit score of at least 600
Minimum annual business revenue of $300,000
10 months of deposits in a business bank account
Backd knows the vital role small businesses play in our economy. Our goal is to make your business financing options easier. We make it faster and more convenient for you to get the working capital you need to make your business a success. More than 3,700 businesses are currently Backd, apply today to become one of them!