How to Fund Your College Side Business

How to Fund Your College Side Business

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College enrollment is up, and it’s only expected to increase in the next decade. In fall 2014, 17.3 million undergraduate students were enrolled in U.S.-based colleges, up from 13.2 million students in 2000, according to the National Center for Education Statistics. Enrollment is projected to increase to 19.8 million students between 2014 and 2025. So what’s the big deal? Why such large increases in college enrollment?

In terms of career earnings, the typical bachelor’s degree graduate worker earns $1.19 million, twice what the typical high school graduate earns, according to economic policy initiative The Hamilton Project.

However, a 2009 study by Institute for the Study of Labor found that salaries for entrepreneurs tended to be 50% higher on average than that of salaried employees, Forbes reported. Of course, your mileage may vary, depending on your circumstances. However, the promise of earning more and creating your own business might appeal to many of today’s college students, who might be looking at starting side businesses while they finish their college courses.

As you set up to be a college entrepreneur, the question then becomes: How in the world do you finance your business? Most college students have little to no established personal credit profiles, no business credit profiles, limited income streams, and no established professional networks. If the age-old saying is true that “it takes money to make money,” how do you find the capital needed to fund your college side business?

Let’s explore some of the options available to college students to fund their college side business, as well as look at a few standout college students of yesterday who turned their college “side” businesses into large corporate enterprises.

Options You Probably Won’t Qualify For

So you have no established personal credit profile, no business credit profile, little income, and no established professional networks. Based on that, you can pretty much take these options off the table:

• Equity financing/venture capital from people you don’t know

• Business term loans

• SBA loans

• Nonprofit micro loans

• Alternative business loans

• Merchant cash advances

• Asset-based lending programs

Options You Might Consider

The good news is, you’re not entirely without options. So then what are your options for funding your side college business? Let’s take a look.

Personal Savings

So you are enrolled full time for college courses, but on the side you have employment where you work 30 to 40 hours a week. If you currently reside off campus and attend a commuter college, you might be living with friends and family, which brings down your living costs. The surplus in cash can be used as savings to invest into your business. So you would be going to school full time, with a full-time W-2 position, as well as with a business you are operating on the side.

Friends and Family

Speaking of friends and family, you can try to get them involved in your business idea. You could pitch the idea to get them to invest in the business through an equity position where they might hold 15% to 30% ownership, which gives them 15% to 30% of profits, in exchange for providing an “X” amount of investment capital into the business. Or, they could provide you a low interest two-year loan for working capital purposes.

GoFundMe/Crowdfunding

Many entrepreneurs will use GoFundMe and other crowdfunding platforms to get individuals to support their startup venture. If your business has the potential to make impact in a local community, for example, individuals might be willing to invest money into the venture to help serve the particular community cause.

Trade Credit

Depending on what your business sells, sometimes you might have suppliers that are willing to provide operational materials on trade credit. Trade credit is when a supplier would allow you 10 to 90 days to pay for business materials, rather than requiring payment in full upfront. For example, you could purchase materials with an invoice of $5,000 that might list “10% 20, Net 90,” meaning if you paid the entire invoice within 20 days, you would receive a 10% discount, but otherwise the invoice would be due within 90 days.

Accounts Receivable Factoring

While on the topic of trade credit, it’s from trade credit that we get accounts receivables. So with the explanation of trade credit above, let’s say you wanted to provide something similar to your client base (again, depending on whatever products/services you are going to be selling) where you allow them 30 to 90 days to pay for your services in full. A factoring company can come in and buy up your outstanding invoices and advance around 60% to 80% of the amount back upfront, then once all of your clients pay in 30 to 90 days, they will provide the remaining 20% to 40% of the receivables to you minus a discount fee of 2% to 6%.

Purchase Order Financing/Vendor Line of Credit

This product is sort of like a sister product to accounts receivable factoring. The factoring company will work with your chosen vendors and suppliers to pay them directly for the operational materials you need for your business. Once the materials are received, you sell your products, and collect payment from your customers, the factoring company would be paid from a portion of revenues.

Real Estate Hard Money

A lot of college entrepreneurs are buying up low-dollar real estate in certain areas, rehabbing the properties, and selling them for a profit. There are real estate hard money lenders out there that you can leverage to acquire properties. The approval is weighed more on the value of the property along with the fix-and-flip project outline, rather than the current credit standing of the borrower. This means with a limited personal credit history, as long as you have found a “good deal” in terms of the property acquisition along with the fix/flip blueprint, you could find a hard money lender to back you with usually up to 70% of the LTV of the property.

Equipment Leasing

Even though you are a startup with little in the form of personal credit history, there are equipment leasing companies that will approve you for small leasing programs to help you acquire computers and other small equipment. A word of caution though, due to your lack of personal credit history, the lease factor rates will usually be very high, so it might be in your best interest to seek out other options for financing.

Credit Cards

There are some credit card companies that will approve college students with no personal credit history for a very low limit credit card. However, the monies they approve you for will usually not be much to provide any type of working capital usage, and the APR associated will usually be very high (likely with an annual fee included with the account), so it might be in your best interest to seek out other options for financing.

Your “Little” College Side Business Could Grow Into Something Big

As a final word, while you work your startup, remember to dream big, as you never know if your little side business could turn out to be the next great big corporate enterprise:

• In 1970, while enrolled at University of Southern California, Paul Orfalea used a $5,000 loan to create the first Kinko’s location, which would grow to over 1,200 locations worldwide.

• In 1975, college dropouts Bill Gates (Harvard) and Paul Allen (Washington State University) would go on to create Microsoft.

• In 1984, 19-year-old Michael Dell founded Dell with only $1,000 while majoring in pre-med at the University of Texas.

• In 1994, Stanford University PhD students Jerry Yang and David Filo would create what would later be known as Yahoo.

• In 1998, Standard PhD students Larry Page and Sergey Brin created what would go on to become Google.

• In 2004, while enrolled at Harvard, Mark Zuckerberg used financing from his college buddy Eduardo Saverin to create a social networking site, later to be known as Facebook.

• In 2011, Stanford University students Evan Spiegel and Robert Murphy created what’s known today as Snapchat, which has valuations of over $18 billion.

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About the Author — John Tucker has over ten years of professional experience in Commercial Finance and Business Development. Tucker is also an M.B.A. graduate and holder of three bachelor's degrees in Accounting, Business Management, and Journalism. To connect with John Tucker, feel free to send him a connection invite via LinkedIn at: www.linkedin.com/in/johntucker99

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  • Ray Daily

    I enjoyed this read and consider it as a good idea/topic, but here are my criticisms: there aren’t any examples such as brand names and active companies that could help. Links to those would be beneficial (factoring companies? Equipment leasing options? Etc.) The examples of college side businesses are too far fetched and basic. Meaning, we’ve all heard of those big named success stories, but it would be good to see current college businesses/entrepreneurs.

    • Jared Proctor

      Great comment, Ray! You’re right – there should be actionable links for each business financing option. We’re going to add them. Also, our marketplace includes most options: https://www.nav.com/marketplace/