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FAQs about Financing a Business

What is equity financing?
Equity financing means selling shares or ownership of a company in exchange for capital (funding). There are numerous pros and cons to this type of financing.

For the company, the capital does not have to be repaid. Since the investor owns a part of the company, the investor will want it to be as successful as possible. This also means there is no monthly obligation with interest and charges either. On the other hand, you have to share ownership in the company and the investors will share your profits and you’ll have to consult with them anytime changes are made to the company.
Can I borrow from my 401(k) to start a business?
Yes, you can borrow from your 401(k) to start a business but there are limitations. If your 401(k) plan administrator allows, you have three options for borrowing from it.

The first option is a 401(k), assuming your plan administrator allows it. If so,the IRS allows you to borrow up to half of your vested balance, or $50,000—whichever is less, which can be used for funding. The second option is called a ROBS, or rollovers as business startups. This is a more complicated way of using funds from a retirement plan without paying taxes or early withdrawal penalties and your business has to be structured as a C-corporation.

The third option is to take a distribution from your retirement account, but this is costly because you’ll owe taxes on it plus a 10% early withdrawal penalty, unless you’re over the age of 59 ½.
What’s the best way to finance a new business?
Since you have several options for funding a new business, it’s important to understand the pros and cons of each option available to you. Start with yourself and determine if you have the means to save for your new venture or have access to savings. This gives you complete ownership of your company and allows you to keep all of your own profits.
How can you finance a business with bad credit?

The good news is, it’s possible to finance your business even with a bad credit score. This is because the overall company health is a major factor in approval and less on a credit score. When lenders review your credit, a minimum score of 500 is typically needed, but they also need to see how long you’ve been in business and the amount of annual revenue. 
 

If you do have bad credit, you can expect higher interest rates and higher fees, but you still have lending options. Look for funding opportunities including:

Each of these products have various requirements for minimum credit score, months (or years) in business, and annual revenue. You may also find it easier to qualify for a secured option, which requires collateral, such as property or inventory.

Conclusion

How to get funding for a business will look different for one company versus another. You may choose the route of self-financing, or you may decide a business loan is the best option. When it comes to financing, there is no one-size-fits-all approach, which is why it’s vital for a small business owner to weigh all options before choosing the best fit. With the right funding in place, it can take your business to an entirely new level of operating that you never thought possible.

About the Author

Sara Coleman

Sara Coleman

Freelance Finance Writer

Sara Coleman is a freelance writer with several years of experience covering personal finance topics such as insurance, loans, credit cards, budgeting and more. Sara's work has been published across numerous financial sites. She is also a published children's book author.

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