So you want to start a new business, but either don’t currently have the money or don’t want to dip into your savings or retirement account? What options do you have? Here’s how to fund a new business venture without having to self-fund it.
Why Savings Shouldn’t Fund a New Business
A lot of new business owners conclude that dipping into their retirement or savings accounts is the best way to fund a new idea, but this can actually sabotage the future success of your business. Why? Because cashing out your own funds—especially from taxable investing or retirement accounts (e.g., 401K)—can cost you upwards of 40% in taxes and penalty fees.
Besides forking over money to pay taxes and other fees, you’ll also lose out on any future earnings your money could bring in. What will you have to fall back on in retirement? What happens if you have a financial emergency and need the money from savings? If you use your personal funds for business ventures, you won’t be able to keep yourself afloat financially.
You’ll also be losing out on any future tax benefits, like a Saver’s credit and other deductions. And if your employer contributes a match to your 401K, you’re essentially forfeiting free money. For these reasons, it’s best to avoid funding a new business yourself—at least in it’s entirety—and consider these other options.
Seek Out an Investor or Partner
One of the best ways to fund a new business is to work with a partner or investor who has the capital and is willing to invest in your idea. This method is especially helpful if you’re launching a tech startup or product-based business, as the investor may have a large amount of capital to cover startup costs and inventory.
Do you have friends or family members who could be a good fit for this role? Or do you prefer to seek out someone through your professional network? A good place to start is with an angel investor, a friend of a contact you know or a website like Gust.com.
Consider Crowdfunding Your Idea
Before investing all of your time researching and seeking out other ways to find money, consider offering your idea to the masses through crowdfunding. This route could allow you to receive the cash you need upfront to get your new venture off the ground.
Sites like Kickstarter.com are the perfect way to bring your idea to the market, as users commit small sums of money in exchange for being the first people to use your product/service.
This method has been proven as a viable way to infuse a business with cash, and there have been quite a few successful ideas brought to the market because of it. Some crowdfunding campaigns have grossed more than $1 million from user pledges.
Bootstrap Your Business
Bootstrapping a business is not a new concept, but it is a smart way to build a business from the beginning without having to split any equity or revenue. Bootstrapping is the process of consciously spending your time as a resource to grow your business instead of exclusively using money to grow it. Bootstrapping is a slower process, since you’re choosing the DIY route of doing most of the work yourself, or asking friends and family to volunteer their skills.
It’s not about being cheap, but being very aware of where you’re spending your money. Bootstrapping helps you choose the right areas of your business to invest in. The point is to always keep the bottom line in mind while striving to have the business turn a profit on it’s own.
Enter a Business Contest
Thanks to big corporations, you can participate in business contests that allow you to receive a grant of up to $100,000. Apply for a business grant by submitting your information and business plan. Be sure to follow the instructions precisely so your business has the best chance possible.
Every year, Chase gives away $100,000 to 20 small businesses through its Mission Main Street grant program, while FedEx offers up to $25,000 to the grand prize winner of its Small Business Grant Contest.
Another resource is Amazon’s AWS program, which offers startups a chance to get their ideas off the ground through access to the best free resources for marketing, cost-cutting and scaling.
Leverage Your Day Job
If you still have a regular 9 to 5 job, consider building your business on the side, during evenings and weekends when you’re not working at your traditional job. I like to call this my “Purpose Project” since I’m essentially using my day job to fund my dream job.
If you hope to take your side business full-time in the future, set aside any extra hours, holiday pay, raises and work bonuses into a separate savings account earmarked for your new business. It may take some time to grow the business, but you won’t have to use any savings or loans to fund it. You can basically cash flow your side business by leveraging any extra income from your day job.
It’s important to have a good game plan if you choose this method, however, as working a day job alongside your side business can burn you out quickly. Remember the purpose of what you’re working towards, and use the funds you’ve saved to launch your new venture.
Are you thinking of starting a new business? What are some other ways you can fund it without using savings? Get creative and use these ideas to give your new venture the best chance at success.