You want to start a business, but like many business upstarts, capital is limited. Does that mean you can’t start a new business? Hardly.
There are ways to start a business with no money. That isn’t to say you won’t need to come up with some money upfront. But you can keep that to a minimum, and if you still need financing, there may be sources available.
But let’s start with strategies to minimize the amount of capital you’ll need upfront in the first place. Even if financing is available, you’ll need to use as little as possible to keep your cash flow healthy.
What’s Ahead:
Choose a business that needs little upfront capital
There are many different businesses you can start today that require very little upfront capital. High on the list are businesses that provide services.
These are the kinds of businesses where your “product” will be a service that you provide. Since you won’t be selling products, there will be no need for inventory, a shop to manufacture it, or warehouse space to hold it.
Many service businesses can truly be started on a shoestring. This is especially true if your business is Internet-based. It will cost little more than setting up web hosting and designing a basic website. That can usually be done for no more than a few hundred dollars. And if you’re tech-savvy, you may be able to do it yourself and save even more money.
Start your business as a side hustle
One of the most important realities in starting any business is that you need cash flow. This is problematic for any new business. Don’t expect to hang a shingle – or launch a website – with the expectation that money will begin rolling in from the get-go. It may take months or even a couple of years before you have anything resembling a steady cash flow.
A better strategy is to start your business as a side hustle. This will give you an opportunity to build your cash flow before going at the business on a full-time basis.
You can use your income from your current job as your “cash flow”, at least in so far as covering your living expenses and providing important benefits, like health insurance. That will give you the time you’ll need to build up your side hustle.
It’s a low-risk way to start a business, since you’ll be able to develop your cash flow while you’re still on your employer’s payroll. That will also give you room to make mistakes. Very few businesses are successful coming out of the starting gate. But if you start yours as a side business, you’ll be able to make a mistake or two, and still keep rolling forward.
Once you reach a point where the cash flow from your side hustle at least shows the potential to turn into something much greater, you can take the leap of faith into full-time.
Buy limited equipment
Many new business owners – overflowing with optimism – invest money in what might be best termed as appearances. That can include renting office space, buying furniture and equipment, and launching a costly marketing plan. That may seem like an enthusiastic start, but you’ll be spending a lot of money before you earn your first dollar.
A better strategy is to begin with a minimalist approach. Purchase only the least amount of equipment you need to start your business. That may be no more than a decent computer and a smartphone. You can add more equipment as it becomes necessary, and your cash flow grows.
If you do need additional equipment early in the process, look into buying it secondhand. You can often get decent used equipment for pennies on the dollar. Later, as your business grows, you can gradually replace the older equipment with newer and better ones.
Use the same approach with office space. Start your business out of your home office or even your garage if your business requires it. The time to get dedicated business space at a cost will come once your business is up and running.
Invest only in what’s most essential to your business
This is true throughout the business ownership cycle, but even more so when you first launch your business. Whatever you choose to invest in should be directly related to revenue generation.
Two natural investments will include marketing and any necessary training.
Marketing
Marketing will be needed to generate cash flow. But even that should be done at as little cost as possible. We’ve already discussed setting up a website, and that’s the most basic form of marketing.
Fortunately, that’s not expensive. Once you have it up and running, you can begin spending time promoting it. And as luck would have it, that’s not all that expensive either.
You can promote your business website by participating in online forums, writing articles on related websites, and making generous use of social media.
Training
You’ll also want to invest in training. That will include developing any skills necessary for your business.
Even this can be done on the cheap, if you make liberal use of the many resources available on the web. YouTube is an excellent source of training on just about any topic you can think of, and is completely free to use. It’s also a potential marketing outlet that you should carefully explore, if your business will lend itself to that kind of medium.
Finance growth out of business income
In this article, I stress the need to launch your business on a shoestring. But as your income grows, you’ll need to reinvest some of your cash flow back into the business.
This is known as internal financing. Rather than using loans to grow your business, you instead expand through reinvesting your cash flow back into the business.
Not only does that give you the capital needed to grow your business, but it also eliminates the need to take one debt.
Redirecting your cash flow into your business will also reduce the amount of income you have available for living expenses. But it has the advantage in that it doesn’t create a future liability, that continues to cost your business money long after the financed expansion is in place.
Get a silent partner
If you do need upfront capital, and you either can’t qualify for financing or don’t want to go that route, you can bring in a silent partner.
A silent partner is someone who invests in your business, in exchange for an ownership stake in the company. But he or she doesn’t actively participate in the running of the operation.
You, as the active partner, will run the business. You’ll also be the frontman/woman, representing the face of the business. Customers and clients will see you as the full owner of the business because your silent partner will be just that – silent.
The advantage of a silent partner is that you won’t have loan payments to make every month. That will give you a better chance of succeeding in business.
But bringing in a silent partner isn’t without drawbacks either. The most obvious is that you’ll be sharing ownership with the silent partner. That also means sharing the profits.
That can also create issues on the operations side. Even though you will be in charge of day-to-day operations, the silent partner will still have a say in how the business is run. After all, a silent partner has an investment in your business, and that comes with a certain authority.
But perhaps the biggest disadvantage is when the business becomes profitable. At that point, you’ll be doing all the work, but sharing the profits with someone who’s invisible – or silent, if you prefer.
Think long and hard about bringing in a silent partner.
Getting financing for your business
Unfortunately, the news here is mixed. There are ways you can get financing for your business, but each comes with its own set of limitations.
Four prominent examples include the following:
Bank business loans
These would seem to be a natural option, right? But small business loans are notoriously difficult to get, and banks are understandably reluctant to lend to business upstarts. Fortunately, technology has made it easier than ever for startups and other small businesses to get the money necessary to get things moving.
The best course of action for a small business is typically a more specialized institution. Microlenders and online lenders have much more flexibility in their lending decisions, but how do you know where to find them?
LendingTree, I’ve found, helps you gather the information on the type of loan you need, and then provides recommendations of lenders. Using this information, you can compare the offers and more easily get a better deal than you would have if you’d only approached one lender. Plus, LendingTree makes the whole process fast and easy to follow.
Credit cards
These may be the easiest source of short-term financing, but they come with a few drawbacks. First, this is just about the most expensive source of financing. Interest rates are high, particularly on cash advances. And credit cards typically charge an upfront fee of between 3% and 5% on cash advances.
Home equity loans and home equity lines of credit
This will be an option if you’re a homeowner, and if you have sufficient equity to borrow against. But just be aware you’ll be putting your home up as collateral for the loan. If your business fails, you’ll still be on the hook for the equity loan or line.
Unlike a home loan, a home equity line of credit issues no money upfront. You’ll get a fixed amount that you can borrow against whenever you need it. That amount will be a large percentage of the equity you have in your home, which is the difference between what you owe and how much your home is now worth. Lending Tree can connect you with competitive interest rates on HELOCs (home equity loans) starting at $25,000, but the larger the loan, the lower the interest rate you’ll typically pay.
To qualify for a line of credit, Lending Tree requires proof that you can pay your mortgage with your current income, as well as a strong credit score. If you choose this option, make sure your loan allows a draw period where you pay only interest. At the end of that draw period, you’ll begin making payments until the loan is paid in full.
Retirement plan loans
Under IRS rules you can borrow up to 50% of your vested interest in your plan, up to $50,000. But the most obvious problem is that the loan depends on your continued employment. If you leave your job – which you will likely do because of your new business venture – you’ll need to repay the loan within 60 days.
If you don’t, the employer is required to report the unpaid principal as a distribution. That will be subject to both ordinary income tax and a 10% early withdrawal penalty.
Personal loans
For most upstart businesses, personal loans will likely be the best source of financing. These are widely available from online lenders.
You can borrow up to $100,000 without putting up any collateral, and with interest rates as low as 3.84% for fixed-rate loans. Loan terms are from three to five years, and there are typically no prepayment penalties Best of all, the loan proceeds can be used for any purpose at all, including starting a business.
Personal loan sources we’ve reviewed and recommend here at Money Under 30 include the following:
Lending Tree
Lending Tree offers a large selection of business loans, from short-term and long-term options to working capital and equipment financing funds. You can use their business loan calculator to determine how much of a monthly payment you can afford before deciding on an option.
You can also check your credit score and take advantage of tips to help you boost your chances. If you’re looking for an SBA loan, for instance, LendingTree lists the factors that lenders consider so that you can make sure you check off those boxes.
Credible
Another loan option to consider is Credible, which takes a unique marketplace approach to lending. You’ll sign up and wait for offers to start rolling in from up to 11 lenders interested in winning your business. These rates aren’t just ranges though. They’re customized to your unique credit score and borrowing needs, and you can request loan amounts between $1,000 and $100,000.
Since the entire process takes place online, this is the perfect option for a busy professional who doesn’t have time to price multiple lenders.
A few things to consider when starting a business
Now that you’ve got some solid tips on how to start a business, I want to point out that there are two major expenses you need to consider before diving in: insurance and taxes.
Business insurance
You need business insurance for the same reason you need any other type of insurance: to protect your assets and cover your basis if something unexpected happens. Business insurance can cover everything from lost income to lawsuits, and more.
Taxes
Never forget to consider how much you’ll need to pay in business taxes. What you’ll pay will obviously depend on the type of business you run, but any small business can expect to pay income taxes, estimated quarterly taxes, and employment taxes.
Depending on your state, business size, business type, and more, you’ll pay different amounts in taxes, but it likely won’t be a small chunk of change. That’s why it’s important to work this number into your overall budget.
Summary
As you can see, it is possible to start a business on a shoestring. The best types of businesses are the ones that rely primarily on your skills and talents, and not on a large investment in office space, equipment, or inventory. At that point, your primary investment in the business should be improving your skills, like your product knowledge and marketing skills.
But if you still need financing, there are options available. Personal sources, like credit cards, home equity loans, and retirement plan loans are certainly possibilities. But each does come with significant limitations.
Carefully plan your business start-up, with an eye toward keeping your upfront costs low. The better you’re able to accomplish that mission, the greater the likelihood your business will be a success.