Securing the money to kickstart your company can be overwhelming. The questions begin to swirl in your head, “What are my options? How much do I need? What about taxes?” Here are things to consider when securing capital for your business, banking options, and preparing to pay business taxes. 

Takeaways

  • The different ways to finance your business
  • What banking options you may find and best practices
  • Why it’s important to find tax help

Types of financing options

Debt and equity financing are the two types of financing you can use to get your business started. Using debt to finance your business usually involves an institution or individual offering a loan or line of credit (LOC) that must be repaid in a certain amount of time. These loans or LOC are usually secured by assets. Unsecured loans are an option, but they may come with higher interest rates. 

Equity financing is the act of raising money for your business by selling a part of it to an investor. Normally, you don’t pay anything back, but the stakeholder has all the benefits, voting rights, and profit share that comes with the equity stake.

Some businesses can choose both options to raise capital to get the business off the ground. Your best option depends on your situation and what your business goals are.

Here are some typical ways people raise money to fund their business.

Savings

‍This is the safest way to raise money for your business, but it also is limited by how much you can save in a given amount of time. 

Credit cards

These are a way to address cash flow issues. However, you run the risk of overuse and becoming susceptible to the higher interest rates of credit cards. Use sparingly and pay off your balance as quickly as possible. 

Your network

It’s always a pain to ask for money from family and friends, but some people turn to crowdfunding to raise funds for their business. Others offer their friends and family equity stakes in their new companies. Get everything in writing and make sure your agreements are legally binding. ‍

Business loans and lines of credit

Starting off, these are hard to secure for small businesses from financial institutions because many require detailed business plans, budgets, cash flow projects, and proof of profitability. You’ll need to be able to show you are a stable and growing company before banks offer you financing, even if the loan is secured. However, working on the 5Cs of credit for your business can make you a good candidate for financing sooner than later.

Small Business Administration microloans

The United States’ Small Business Administration offers microloans to small businesses trying to raise capital. The SBA’s lending partners can offer loans up to $50,000. However, SBA and other business-friendly organizations have other options for securing business loans. Do your research before committing to any financing agreements.

At the end of the day, when looking for financing, make sure you have a strong business plan and budget. You don’t want to over-borrow. Also, use your network for connections and advice. We highly recommend that you consult with a licensed financial advisor or a tax consultant before proceeding. ‍

Banking for small businesses

Once you get funding, you’ll need somewhere to keep all that money. We suggest opening a business specific checking and savings account. Early on, some business owners choose to keep their personal and business accounts together. This can lead to complications come tax season or when you want to analyze how your business is doing. Before opening any account, make sure you read the fees schedule and do your research. There’s nothing worse than being blindsided by fees. A business-specific checking and savings will allow you to create different profiles and permissions for employees to keep track of your transactions and improve your bookkeeping practices.

Small business tax tips 

More capital and spending means that you’ll have to track all of your expenses and income come tax time. Make sure that you invest in digital tools to track your income and expenses (ex: Quickbooks, Freshbooks*). If you insist on doing your taxes yourself, investing in tax filing software (ex: TurboTax, H&R Block*) is a critical expense. If you can afford professional tax services, your business will benefit from their expertise and knowledge. The last thing you want to do is overpay a tax bill.

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There are a lot of potential minefields when it comes to financing and tracking your spending as a business. However, if you seek sound advice, invest in the right tools, and proceed with caution, you can create a system that sets you up for success and scaling your business. 

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* Hearth does not endorse any specific products or services. This is an example of a company with similar products. 

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The above content is for informational and/or educational purposes only. It does not constitute professional financial advice. If you have more questions, please reach out to a financial advisor for more information.

Hearth is a technology company, which is licensed as a broker as may be required by state law. Hearth does not accept applications for credit, does not make loans, and does not make credit decisions; this site does not constitute an offer or solicitation to lend. Hearth may be compensated by third-party advertisers. However, the compensation will not impact how or where the product may appear on this site. The offers on the site do not represent all available financial services, companies or products. NMLS ID# 1628533 | NMLS Consumer Access.