Credit and finance options for young entrepreneurs
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
will be graduating from college soon and want to start a business. I don't have
a credit card, so I haven't built up much of a credit history. What types of
financing options are available to someone like me? -- Self starter
Dear Self starter,
Before you start looking for financing, it's important to
figure out what your expenses will likely be and how much they will cost you.
That will help you go after the right financing options.
Try writing a simple business plan, including a budget and
revenue projections for the first year. Since you may have student loans to pay,
as well as living expenses, you'll want to conserve cash by minimizing your business
As you create the budget, ask yourself if each of your
planned expenses is a "want" or a "need." You may want to rent an office in a
co-working facility immediately, but if you won't realistically be able to
generate any revenue in the first three to six months, you may be better off working
from home until then. (This can be a little isolating, especially if you are
running a one-person business. Joining a group for entrepreneurs such as Lean Startup Meetup to help you connect with others trying to achieve great things on a shoestring.)
Once you know how much money you need to spend on the
business, you can start figuring out how to get it. It's not realistic to
expect to get a bank loan for a brand-new startup, especially if you have a
limited personal credit history. Bankers will want to know you will be able to
pay them back -- even with the credit climate thawing a bit -- and it will be
hard to provide any proof, such as a high credit score.
Your best option may be to earn the money for your startup --
either before you start selling anything or while you're building a customer
base. In a business where you'll be selling a product that generates immediate
cash, whether it's T-shirts or gourmet coffee, paying for your overhead out of
cash flow may be a good option. This is what's known as bootstrapping.
If you are starting a professional services business, it'll
take a few months to complete projects and get paid for them, so you will need
some other source of cash during that period. Taking a job that generates some
income may do the trick.
For basic expenses such as office supplies, a credit card may
be enough to cover your needs. CreditCards.com publishes a list of student credit cards designed for
young people who have not had a chance to build much of a credit history. If
you are younger than 21, you will need to show proof of income or have an
adult co-signer, such as a parent, on the account.
Make sure you understand the terms of the deal you're
getting. Some credit cards can be expensive to use, especially if you can't pay
off the full balance each month. The 2012
Year-End Economic Report by the National Small Business Association found
that the percentage of small businesses using credit cards for financing
falling. It dropped from 34 percent in 2011 to 31 percent a year later, the lowest
percentage since the survey started asking about this in February 2008. Among
respondents, 49 percent believed the terms of their credit cards had worsened in the past five years.
Crowdfunding can be another good option for startups. In
this form of financing, you can create a campaign on a site such as Kickstarter, Indiegogo or RocketHub, soliciting small donations from
customers, supporters and friends by contacting folks in your social network. If
you reach the funding goal you set by a deadline you select, you get to keep
the money. If not, you forfeit it.
It's not always easy to raise money this way. Research released in March 2013 by Ethan Mollick, an assistant professor at the University of Pennsylvania's Wharton School, looked at more than 48,000 crowdfunding campaigns on Kickstarter. It found that
the bigger the founder's social network, the greater the odds of success. It
also helps to get featured on the site and to be able to offer evidence that a project
is high quality by, for instance, posting a video teaser of a film project. But
the work you put into building a strong campaign can pay off. If you succeed in
raising money, you won't have to pay back your donors.
If you need more substantial funding, bringing in an equity
investor may be a good idea. Some young entrepreneurs enter local business plan
competitions with the hope of meeting financial professionals who can help
them. Often, these competitions recruit private investors, known as angels, and
venture capitalists as judges. Others may put you in touch with lenders who are
interested in reaching out to the small business community, though this is less
common. Check in with the business school at your university to find out if
there is a contest at your school. Many competitions are open to alumni, so
even if you missed this year's deadline you may be able to enter the next one.
See related: Should you fund your startup business with a credit card?, Creative financing for small businesses, An ode to credit cards for entrepreneur's business startup
Elaine Pofeldt is a journalist who specializes in entrepreneurship and careers, contributing to publications such as Fortune, Money, Working Mother and many others. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals.
Elaine answers a question about small business and credit from a CreditCards.com reader each week.
Send your question to Your Business Credit.
Published: April 15, 2013