Your Go-to Guide to Raising Capital for a Startup

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A person sitting in a creative office smiles while thinking about how to raise capital

Real estate, equipment, inventory, technologies, wages, and insurance are some of the many costs you’ll need to cover when starting a new business. Those costs can be substantial, and to a person with limited cash on hand, they can seem insurmountable. Fortunately, there are many ways to raise the capital you need for startup.

In this article, you will learn about the financing options you can use to cover your costs.

 

How can I raise capital for startup?

There are quite a few ways to amass the cash you need to cover your business’s initial costs. These include:

 

Checking and savings accounts

Many owners use this pool of cash before considering any other cash sources. It’s the easiest to access and use to fund a new business idea. If you have cash available in either of these kinds of accounts, you should calculate how much you’re willing to part with to start or grow your business. You can contact a banker for help with these calculations.

 

Investment accounts

Do you own stocks, bonds, or mutual funds in a taxable investment account? You could use them to raise capital for startup. Here's how:

Sell them. By selling your securities, you might raise all or a portion of the cash you need for your investment. Keep in mind that sales can result in mutual fund fees, broker commissions, and the realization of capital gains. Be sure to speak with a qualified investment professional before proceeding with this option.

Borrow against them. You may also consider a portfolio loan (sometimes called a pledged asset line) to raise the cash you need for your investment. Through a portfolio loan, lenders use your investment savings as collateral and allow you to borrow up to 70 percent of the value of your accounts. Because these loans are backed by collateral, they tend to have low interest rates and are relatively easy to qualify for, provided you can meet the funding minimum your lender requires. You can learn more about portfolio loans here:

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Speak with a banker to navigate the tax consequences of selling securities and the risks of borrowing against them.

 

Personal lines of credit

A line of credit provides access to a predetermined amount of cash you can borrow and repay according to your lender's terms. Many banks will allow you to set up a personal line of credit to use however you see fit, which can include covering the costs of a new business.

This option involves some degree of risk. Failure to repay the funds you borrow could negatively impact your personal credit score. It can also keep you from attaining favorable terms on any loans you need to take out in the future.

Interested in this form of funding? Contact a local bank or credit union or work with an online lender.

 

Retirement plans

Have you been contributing to a retirement savings account? You may be able to use those funds to cover some of your upfront expenses. There are several ways to access the funds in your retirement savings accounts, but it’s important to note that any use of your retirement savings introduces risk, and in some cases, tax concerns.

For more information about using your retirement plan to cover the costs of a new business venture, check out this guide:

 

Home equity

Do you own a home or other properties? You may be able to borrow the difference between what you owe and what the property is worth. Many lenders offer home equity loans with favorable terms and minimal restrictions on how the funds can be used. The drawback is that these loans require you to put up your house as collateral. This means you could lose your home if you fail to repay a home equity loan.

Be sure to speak with a banker before considering a home equity loan to cover your business’s costs.

 

Cash-out mortgage refinance

Another option is refinancing your home or property mortgage to secure the funds you need. With a cash-out mortgage refinance, you can pocket the difference between what you owe on a property and 80 to 95% of the property’s full appraised value.

Rates and closing costs can be higher with this option than a traditional refinance, so consider this option carefully before moving forward. Speak with a banker to explore this and other ways to cover the costs of your startup.

 

Second mortgage

You could also consider taking out a second mortgage on a property you own to cover some of your business costs. Second mortgages are structured very similarly to a traditional home mortgage with clear repayment terms and interest requirements.

It can be difficult to find a lender who’s willing to provide this type of financing. Most banks view second mortgages as higher-risk investments of their money. Those that offer them charge higher interest rates than they might for a traditional home mortgage. Again, you should speak with a banker before considering this option.

 

Term loan

Many business owners apply for term loans to cover part of their startup costs. Term loans, which can be attained through a bank, credit union, or online lender, often have favorable terms and long repayment schedules. However, they can be difficult to qualify for, especially for borrowers with less-than-perfect credit.

You can learn more about term loans and their qualifications in this guide:

 

SBA loan

SBA loans are one of the most common ways to cover early-stage costs. Named after the Small Business Administration that guarantees them, these loans allow owners to finance some of their startup costs, working capital expenses, equipment needs, and building acquisition or improvements.

The SBA offers three kinds of 7(a) loans to owners to cover up to 90 percent of their startup costs, working capital, and equipment needs. They also offer 504 loans for the purchase of existing buildings, the purchase of land or land improvements, the construction of new facilities, the renovation of existing facilities, or the purchase of long-term machinery.

To learn more about SBA loans and their requirements, check out this guide:

 

Asset-backed financing

Many lenders offer asset-backed loans to owners who are willing to leverage their business’s assets. Through these loans, you could finance inventory, machinery, non-mortgaged real estate, or other tangible assets to access fast funding.

Asset-backed loans are often easy to qualify for and attain, even for borrowers with less-than-perfect credit. You can learn more about asset-backed financing here:

 

Equipment leasing

Rather than buying and leveraging the equipment your business needs to operate, consider leasing large-ticket pieces of equipment. Many equipment wholesalers and distributors offer five-year leases and provide the option of purchasing the equipment at the end of the lease period.

You can learn more about this option in this guide:

 

Commercial mortgage

If you need a storefront or commercial site and you’d rather buy than lease the property, consider a commercial mortgage. This form of loan can be used to purchase an owner-occupied office building, retail center, warehouse, or other commercial property.

Commercial mortgages are something like traditional home mortgages. However, they differ in both terms and the amortization period. Commercial mortgage terms can range from five to twenty years. The amortization period extends past the term of the loan. Loans structured this way usually require a borrower to make monthly installment payments for the life of the loan and a final balloon payment.

These loans may require higher down payments than SBA-backed options. They can also be slightly more difficult to attain. Further, many lenders require borrowers to guarantee the loan, especially if the borrower is an individual or an entity with no borrowing history.

Learn more about commercial mortgages in this article:

 

Commercial bridge loan

Bridge loans can be a good way to cover commercial real estate costs and other high-ticket items, including large batches of inventory, renovations, or repairs. They can often be attained quickly and relatively easily, even for borrowers with less-than-perfect credit. The loans are collateralized, so lenders tend to worry less about a borrower’s credit history and credit score. However, most still require a credit check for loan approval.

To learn more about this option, check out this guide:

 

Commercial hard money loan

Some non-bank lenders offer commercial hard money loans that are secured by the borrower’s property. This short-term option allows owners to buy commercial property quickly, with flexible terms, and often without checks to their credit history. The interest rate on these loans is usually high. Because of this, many borrowers view these loans as a last-resort option and refinance them into a mortgage at a later date.

Some online lenders offer hard money loans, but most small business owners turn to friends, family members, or local real estate investors to secure this form of funding. Be sure to evaluate the terms of a commercial hard money loan carefully before proceeding with this option.

Learn more about this option and other commercial real estate loans here:

 

Partnerships

If you find you can’t raise enough cash through other means or you aren’t comfortable tapping into a significant portion of your savings or equity, consider bringing on a partner who can help you cover your initial costs.

Similar to the options above, there are risks and benefits to partnerships that should be considered carefully. For more information about forming a partnership, read this guide:

 

Venture capital

You might consider reaching out to venture capitalists or angel investors to raise the money you need. Some invest in the early stages of a promising startup. However, many prefer to see a proven concept before providing the capital its owners need to succeed.

To learn more about venture capital and angel investors, read our guides from our Small Business Financing 101 series, Venture Capital and Angel Investors.

 

Need help deciding?

A banker can be extremely helpful. They'll help you navigate any option their bank offers and find solutions that can meet your needs.

Interested in connecting with a banker? Check out our favorite options:

 

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GoKapital

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Square Banking

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Square offers checking accounts, savings accounts, and loan products exclusively to owners who process with Square. Their loans, which are backed by your card sales through Square, charge a flat fee (no interest) and are repaid automatically with a percentage of your daily card sales. Would you like to learn more about this new way to finance your expenses? Follow the link below to explore the offer.

 

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