An entrepreneur recently approached me about the funding he needed to start a gelato shop. He was looking to secure $150,000 in six months without giving up any ownership of his company.
Brick & Mortar businesses like this gelato shop are hard to fund, especially for first time entrepreneurs who are starting a business from scratch. You have no business credibility to secure a loan from a bank, and if your personal credit is not pristine, you’ll likely be turned down by the SBA as well.
So when your best options fail, it’s time to get creative. Before turning to an expensive Merchant Cash Advance, give these three out-of-the-box funding ideas a look.
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1. Involve your community.
There’s no better way to measure whether or not your business will be a success than through market research. By gauging what your target customers think of your idea, you’re raising awareness of your business and finding product market fit.
Businesses can now combine funding with a form of market research through online platforms, such as Community Sourced Capital, that allow you to raise funds from your community of customers. Community Sourced Capital allows you to set up a campaign, similar to a crowdfunding campaign on sites like Kickstarter and Indiegogo. Members of your community can visit your campaign page and decide how much they would like to lend directly to you.
ZipCap is another option. Through ZipCap, your customers can pledge to spend $X amount at your business within one year. This is just a pledge — there is no obligation. ZipCap will then lend you up to half of the total pledged amount.
If your business is one in which your community can rally around, like the aforementioned gelato shop, sourcing capital from your community is a great option. Our gelato shop owner will not be able to raise $150,000, but it’s a good start until he qualifies for a larger loan.
2. Credit Card Stacking
Credit card stacking is an interesting concept. This is a short-term tactic that you can use to build your business credit profile in order to secure attractive financing terms in the future. Here’s how it works:
A credit card stacking company will submit ~5 – 15 credit card application on your behalf based on how much funding you need and your personal and business credit profile.
These applications will be for business credit cards and/or personal credit cards. They will submit applications for business credit cards first to minimize the affect on your personal credit.
The applications will all be submitted at the same time so that your credit score appears the same on each application — your credit score will go down because of credit inquiries, but not between submitted applications.
The stacking company will keep applying to cards until they hit your requested funding amount.
Here are some of the pros to credit card stacking:
The stacking company will likely apply to cards with 0% intro APRs. Borrow as much as you’d like without paying a dime to the credit card providers for the first 6 – 12 months.
Unlike a merchant cash advance, you will never have to renew this funding source. If you need to use your credit, it will be there for you. If you later decide to let your credit cards sit dormant, there’s no harm and no charge.
And the cons:
The cost. Credit card stacking companies will charge about a 10% fee of your total loan amount. This is, however, a one time fee.
Every time a credit card application is submitted on your behalf, a hard inquiry hits your credit, lowering your score for the next 6 months. If you expect to apply to other financing options within that time frame, be aware that you will be applying with a lower credit score, and your terms will not be as good.
The risk. If you’re a new business, your best guess at how you will be doing in 6, 12, 18 months is still a wild shot in the dark. Try to avoid getting in over your head in debt.
3. 401(k)/IRA Financing
If you have a personal 401(k) or IRA account, you can set up your retirement account to invest in your own company. The best part: there’s no tax penalty for doing so. However, be sure to consult your tax advisor before taking on retirement financing just to be safe.
The checklist of things you’ll need to do to set up 401(k)/IRA financing include incorporating your company as a C-corp and rolling over your 401(k)/IRA to invest in your new company. Check out companies like Guidant Financial and Benetrends that will help you rollover your retirement account. They charge a hefty flat fee, so this is best for businesses looking to make a large investment in their business.
Be careful of this financing option and may other startup financing options. Many businesses fail, so keep in mind that the odds are not in your favor and investing all of your retirement savings in your brand new business is a big gamble.
Bottom line: Once you’re up and running, you should start building your business credit profile. Nav can help you do it – the right way – for free.
Making your business look like a safer bet to lenders lets you get approved for less expensive, less risky capital. And that’s when things really get fun.
Pro Tip: Take charge of your financial health today with a FREE Nav account. We'll protect and monitor your personal and business credit, so when it comes time to find financing you're prepared on all fronts.