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5 Ways to Fund Your Online Business

June 10, 2012 · 9 comments

in Business

Ways To Fund Your Small Online BusinessWe all know that it takes a lot of hard work and money to make an online business successful. Entrepreneurs are hard-working risk takers, so the resolve to pull long hours in the face of unfavorable odds isn’t hard to muster.

Coming up with the dough you need to pay for things like website development, servers, inventory, advertising, etc. is another story, though.

Trying to get by on just your savings is not only extremely risky, but it probably won’t get you too far either, especially considering the current economic climate. There are fortunately a number of other funding sources available to online business owners, and we will explore the best ones below.

1. Friends & Family

Many people are naturally hesitant to hit up folks they know for cash, even if it’s for a promising business venture. They don’t want to put those they’re close with in an awkward position or appear as if they’re in some sort of financial trouble. However, people who know and like you are often the best source of seed money, as they know much more about you than a traditional lender ever will.

The key to effectively leveraging your social network is to be extremely prepared. Put together a presentation that clearly relates your idea, outlines your projections for growth and profitability, and is appropriate for your audience (i.e. use a level of formality that makes sense for the group you are pitching). In addition, make sure to have definitive answers for any conceivable questions you might have to field, such as whether money provided is a loan or an investment, and don’t try to hide the level of risk involved. That will only serve to make you look amateurish or delusional.

2. Small Business Loans

You can garner a significant amount of money via a small business loan, but doing so necessitates having solid credit standing as well as providing the lender with some sort of collateral. This could be problematic given that the Great Recession left roughly half of US consumers with bad credit. If you go the small business loan route, you may want to place added emphasis on Small Business Administration (SBA) loans because the government guarantee allows lenders to relax underwriting standards. The following are the three types of SBA loan programs:

• 7(a) Loan Program: Provides assistance to companies with special requirements (e.g. exporters, businesses operating in rural areas, businesses run by people in underserved communities).
• Microloan Program: Provides short-term loans of up to $50,000 to small businesses. The average loan garnered through this program is for $13,000.
• CDC/504 Loan Program: Provides long-term loans at fixed rates for the purchase of business assets or business modernization. This program is geared toward economic expansion through job growth.

3. P2P Lending & Crowdfunding

It’s interesting, there are online businesses that can help other online businesses garner the funding they need to succeed. Some – called P2P lenders – offer the chance to get small recurring loans from a network of people, yet only make one monthly payment to the host site. These loans tend to have fixed interest rates and lower peripheral costs than funds attainable from a traditional lender. Two of the most popular P2P lending sites are Lending Club and Prosper.

There are also sites that allow you to give equity in your company or free products and services to a number of people in return for small financial contributions, through a process called crowdfunding. One of the most popular crowdfunding sites is Kickstarter.

4. Credit Cards

Small business owners are often hesitant to use credit cards as funding vehicles because A) they don’t think their company’s credit standing will warrant much of a credit line and B) they don’t want to use a personal credit card for fear of putting their personal finances at risk. The truth, however, is that your personal credit standing (and not that of your business) is the most important factor in determining business credit card eligibility, and you’ll be personally liable regardless of whether you use a personal credit card or a business credit card.

That’s a good thing too because not only is credit card debt unsecured (unlike most small business loans), but personal credit cards also benefit from protection against arbitrary interest rates, which is lacking for business credit cards.

5. Angel Investors

There are individuals and companies that invest in up-and-coming businesses for a living. They generally provide a significant amount of funding in return for some sort of ownership stake in your business as well as a measure of control over its direction. Angel investors are usually only in the realm of possibility for companies built upon extremely good, unique ideas that have the potential to be worth millions.

Final Thoughts

In exploring your different funding options, it’s important that you keep in mind the relative advantages and disadvantages of levering debt and equity. Debt is risky in the sense that if your business fails, you’ll be personally responsible for repayment, and that could have negative ramifications throughout your life. On the other hand, leveraging equity requires giving up a portion of your business (i.e. a portion of all future revenue). The options available to you are typically a product of your contacts and credit standing – you won’t be able to get a substantial loan right out of college, after all – but if you have a very lucrative idea, as most entrepreneurs think they do, the value of a slice of your company could end up dwarfing that of a loan.

Image courtesy of FreeDigitalPhotos.net

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Odysseas Papadimitriou is the founder and CEO of Evolution Finance, parent company of both CardHub.com and WalletHub.com. Card Hub operates the nation’s largest gift card exchange and helps consumers compare credit cards and prepaid cards to find the best deals. WalletHub is the first social network built solely around personal finance, and enables consumers to compare, rate and review over 300,000 financial services and products, including banks, financial advisors, and car loans. Odysseas previously worked at Capital One for nearly eight years. During this time, he garnered experience in multiple aspects of credit card operations, ranging from underwriting and risk management to new product development and marketing, where, as senior marketing director, he spearheaded the largest customer giveback in Capital One history. He is considered to be an industry expert in personal finance, and as such his views are routinely featured by leading news outlets such as The New York Times, CNN Money, The Wall Street Journal, TIME, Forbes and the Associated Press. Odysseas holds an MBA from Duke University as well as both a B.A. and a B.Sc. from Brown University.

Odysseas has written 1 awesome articles for us at Opportunities Planet

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{ 9 comments… read them below or add one }

Felicia June 12, 2012 at 9:51 am

Of all the 5 ways you have stated on how to fund your online business, I’d always go for the #1 route: friends and family. After all, who would lend you money if not them? Of course, you have to assess fully about your business venture before you go ahead and ask for financial support from your friends and family. Also, you need to have a backup plan (or more than one backup plan) if in case your expectations did not work out the way you supposed it would.
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Herbert June 12, 2012 at 12:02 pm

Based on what I have learn from others, lending money thru loans is one good idea to fund your business but I dont think if that is the best option though :/

Great list by the way 😀
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Amy Turner June 12, 2012 at 1:39 pm

Getting funds from family and friends is okay as long as you’re sure you can pay them, otherwise, the relationship might go sour. Using a credit card to finance the startup capital is fine, just be sure to pay the monthly bill in full or you’ll end up getting charges which might pile up later.
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Steve Vernon June 12, 2012 at 4:26 pm

I appreciate the way you’ve laid this all out in a very simple, understandable format. Funding a new or growing business can be a rather scary thing, as you are putting yourself on the line in so many ways — not only financially, but your personal and professional reputation, as well. At the same time, as I’m slowly learning, it’s just part of doing business. After all, the entire stock market is built around business financing — even the largest of businesses need funding.

Other options, especially for those in the creative fields (art, film, theater, games, photography, etc), are programs such as Kickstarter and others that provide funding through communities of people not looking for financial return, but rather are simply interested in helping to fund such projects in return for a small reward from the project itself. Obviously such funding is for a much more specific type of business venture, but a venture nonetheless.

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Shelley Alexander June 13, 2012 at 4:18 am

You have listed some good options for funding a new business. I was not aware of Lending Club or Prosper. So far I have funded my new business with my own resources. I’m happy to know about other options if I need the help. Thanks for sharing!
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Gavin Mountford June 13, 2012 at 2:57 pm

Yeah, I think I’d go with a small business loan to begin with… friends and family wouldn’t be interested. But with a strong business plan, the bank would be my best option if I was just starting out…

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Melodie Kantner June 13, 2012 at 8:24 pm

I’d always opt for getting a loan or using a credit card. I hate the idea of asking friends and family for help with financial matters.
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Sylviane Nuccio June 14, 2012 at 4:45 am

Thanks for those tips about borrowing money.

While I would never want to ask for money from family members I have asked my mother plenty of times in the past. Those were the good days 🙂

I had never heard about Angel Investors, seems interesting, but kind of tie your legs up a bit 🙂

Thanks for this info 🙂
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Barbara McKinney July 9, 2012 at 5:06 am

Opting to online strategies is a cheaper way compare to other mediums. Considering the number of internet users nowadays , there’s a greater chance for your business to get find. There are numerous benefits you can get if you do web marketing. So, it is really worth investing for.

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