Smart Investing

7 Ways to Finance Your Side-Hustle, Startup or Solo Business

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By Laura D. Adams, MBA

If you’re considering starting a business or making money with a part-time side hustle, you may be wondering how to finance a new venture. Launching a business and building income takes time and usually requires an upfront investment.

Your business could crash and burn quickly if you don’t have the financial runway for necessary and unexpected startup costs. Consider using one or more of these seven options to finance your business and increase your chances of entrepreneurial success.

1. Use your savings 

Dipping into your personal savings is the easiest way to finance your new or growing business. It may take some time to save enough, but the advantage is not taking on any debt. 

If you have a job with a steady paycheck, don’t be in a hurry to quit. If you build your venture on the side, that gives you a nice financial cushion. Use your current income to pad your savings and help get your business off the ground.

2. Sell valuable assets 

If you have valuable assets–such as real estate, vehicles, jewelry or investments–you’d be willing to sell, they could be a business funding source. While retirement accounts may be tempting to tap, it’s wise to stay away from them and be aware of the expensive downsides. 

For example, most retirement accounts, such as a 401(k) or IRA, penalize you for early withdrawals before age 59.5. Early distributions from a traditional account come with income tax, plus an additional 10% penalty. Roth accounts offer more flexibility for withdrawing contributions that were previously taxed.

Note that if your workplace retirement plan allows loans, you can typically borrow up to 50% of your vested account balance up to $50,000. You generally must repay your account within five years, including interest. 

Dipping into your retirement account for a business or any reason is typically unwise because it leaves you with less or no financial security. So, consider it your financing option of last resort.

3. Take a loan from family or friends 

Many business owners started with funds loaned by their family or friends. They may even offer you a low interest rate or flexible repayment terms to help you succeed.

However, taking money from loved ones comes with risks if you can’t repay them on time and it ends up hurting your relationship. Carefully document the terms of a loan from family or friends so there won’t be any future misunderstandings.

4. Tap your home equity

If you’re a homeowner with enough equity, one option to launch or grow your business is borrowing from yourself. You might qualify for a home equity line of credit (HELOC) or a home equity loan. They typically require at least 20% equity but offer some of the lowest interest rates.

5. Use credit cards

While credit cards charge relatively high interest rates, they give you an easy way to finance your business. If you plan to carry a balance, make charges on a personal or business card with the lowest rate possible, so you pay less interest.

6. Apply for a business loan 

Many financial institutions offer business loans to start or grow your venture. Underwriting requirements vary by lender, but you’ll typically need the following:

  • Personal and business tax returns for the past two to three years
  • Profit and loss statements and balance sheets for up to three years
  • Personal and business bank account statements for the past two to three years
  • Business plan showing projected income and expenses
  • Credit score minimum, such as at least 670.

If you don’t meet a business lender’s credit requirement, consider applying with a co-signer who agrees to be fully responsible for the debt. Another option is applying for a Small Business Administration (SBA) loan, which has fewer requirements.

7. Get a business line of credit

A business line of credit allows you to tap funds up to a limit as you need them. Since you only pay interest on withdrawn amounts, it’s a flexible way to fund your startup. However, you may be required to put up collateral or have good credit to qualify.

Related: Business loan vs. business line of credit: which is best for you?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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