Tapping your personal assets
Relying on personal assets or income from another job are the most common sources of initial funding for the majority of entrepreneurs.1 If you’re dipping into savings, keep in mind that you should still try to maintain a healthy emergency fund — ideally a year’s worth of living expenses — because you may not know how soon you will be able to draw a salary from your business, says Merrill Financial Advisor Judith Lee. If you’re near retirement age, tapping your own assets could be especially risky, because the time to rebuild them is shrinking.
More than a third of women small business owners also use credit cards to help cover operating expenses3. But double-digit interest rates on balances can be an expensive way to fund a start-up, notes Lee. Alternately, you could consider leveraging assets you have in a brokerage account as collateral for a loan. “That allows you to have access to the funds on a short-term basis without having to liquidate your investments and losing out on potential earnings growth,” Lee explains. Another possibility to discuss with an advisor might be to borrow against the value of your home with a home equity line of credit (HELOC). Just remember that if you can’t repay a HELOC, you might risk losing your home. Be sure to talk to your advisor about whether self-funding your business with personal assets will still allow you to meet your other financial goals.
Accepting funding from friends and family
The second biggest source of initial startup money, according to SCORE, is gifts from friends and family members. These sorts of arrangements can work well, but they can sometimes come with strings attached. Be clear about how you might repay such generosity, and be sure to document in writing promises made. Jeni Britton, founder and chief creative officer of Jeni’s Splendid Ice Creams, recalls considering taking a $30,000 loan from family friends when she wanted to start her business. “We were told, ‘Don't take money from anyone right now, because if you do, they will own your company. Exhaust every other option first.’” So Britton applied for an SBA loan. Six months later, the loan was approved and she opened her doors for business. Today, Jeni’s Splendid Ice Creams sells millions of pints each year.
Applying for bank loans
At some point, like Britton, you may want to apply for either a personal loan or a federally backed SBA loan, available through many banks and credit unions. They’re the third biggest source of startup funding.1 SBA loans offer some of the lowest interest rates available and allow you to retain full ownership of your company.
To get a personal loan from a bank, you’ll usually need a sterling credit record as well as collateral, typically a real estate asset. SBA loans have broader eligibility requirements; businesses typically not approved for traditional loans can sometimes qualify, says Nathalie Molina Niño, author of Leapfrog: The New Revolution for Women Entrepreneurs. However, you’ll likely still need to have collateral or a down payment, and the approval process can be slow. You’ll also need to start repaying the loan right away, which can be tricky if you’re just starting out.
Another potential source of affordable funding, not to be overlooked, is a community development financial institution (CDFI). Interest rates and fees on CDFI loans are generally comparable to bank loans, but their mission is to serve low-income or underserved people and communities. In addition to credit, CDFIs offer mentoring and useful financial advice. Bank of America, as one example, partners with CDFIs across the U.S. to connect women entrepreneurs to capital.
Crowdfunding your business
While it’s the least common source of money, crowdfunding has its place in the mix. Virtual fundraising campaigns on popular crowdfunding sites and a few platforms explicitly for female entrepreneurs have become increasingly popular. Crowdfunding has a low barrier to entry and can help you spread the word about your business and build a customer base. While the amounts raised by traditional crowdfunding are generally small — under $10,000 — a newer type of crowdfunding that allows you to sell shares in your business, known as equity crowdfunding, tends to raise larger amounts. Either way, you’ll need sharp promotional skills to draw attention to your business, and you’ll also pay fees, which differ depending on the site.
Approaching venture capital firms
These firms, which invest in start-ups in exchange for equity or partial ownership, can offer a big influx of cash — and the means to quickly grow the business. But women, especially women of color, have historically received only a sliver of VC funding, notes Molina Niño, adding that VC firms tend to not get deeply involved in day-to-day operations yet aim for quick returns.