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5 Ways to Help Young Entrepreneurs Finance Their Business Ideas

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5 Ways to Help Young Entrepreneurs Finance Their Business Ideas

By kmurray, Contributor and Moderator
Published: August 12, 2013

Today is International Youth Day – so what better way to celebrate than to talk about the incredible potential of our young entrepreneurs? In 2012, young entrepreneurs ages 20-34 comprised more than a quarter of the total new entrepreneurship activity in the United States (according to the Kauffman Foundation). That was 26 percent of first-time entrepreneurial efforts being led by the youngest age bracket.

Entrepreneurship can be an exciting adventure, and it can be easier than you might think for the young. The barriers – including cost of entry – are low (working at home, online, etc.), and younger people are often unconstrained by the commitments of family and marriage.

So, do you have a winning idea on which you want to establish a business? While you don’t need a business degree or years of experience to succeed, you will likely need financing to get your idea off the ground. Here are some tips to help you secure the funding you need to launch – or ease the burden of trying to finance – your small business.

1. Deferring student loans

If your student loan repayments are preventing you from starting your own business, the Student Startup Plan (through the White House-led Startup America initiative) enables college graduates, including those looking to start a business, to lower student loan repayments. Its Income-Based Repayment (IBR) Plan can help you keep your loan payments affordable with a sliding scale to determine how much you can afford to pay on your federal loans. This can give you the freedom you need to take risks with new opportunities.

2. Borrowing startup funds from friends and family

With a lack of strong credit history, it’s sometimes challenging for young entrepreneurs to obtain traditional loans through banks or private lenders. In these cases, it’s not uncommon to reach out to friends and family – those who know and trust you already. This is a definite pro, but the flipside comes if something goes sour with repayment or terms and the potentially compromising situation that may develop for you. Check out this blog post for details about best practices and how to work with your friends and family in this capacity. 

3. Consider crowdfunding

An increasingly popular method to obtain financing is crowdfunding – a collective cooperation of people who network and pool their money and resources together, usually online, to support efforts initiated by other organizations. Crowdfunding gathers multiple, smaller investments as opposed to a single source of funding. Learn more about crowdfunding here and in this other recent blog post

4. The peer-to-peer potential

Like crowdfunding, peer-to-peer (or P2P) lending allows you to make your business case to others with the hope that someone will make an investment. The biggest difference between the two approaches is that P2P lending typically focuses on one individual lending to another (versus the “crowd” of lenders). P2P sites allow you to determine how much you need to borrow, define the purpose of the loan and post your listing online. Read about how to prepare your request in this blog post

5. Avoid overinvesting

If you’re relying on your cash reserves, credit cards or savings to start a business, try to avoid some of the overinvestment traps that young entrepreneurs fall into – whether it’s a swish office, computer systems or inventory overload. Focus instead on building a good product and a positive customer experience. Starting a business from home or online are cost-effective ways to avoid some of these pitfalls. These two guides from SBA can help you get started:

One little known option for setting up your new business is to purchase government surplus products. Just about anything you can think of that your business might need is sold by the government at or below cost, or fair market value.

Additional Resources:

About the Author:

Katie Murray

Contributor and Moderator

I am an author and moderator for the the SBA.gov Community. I'll share useful information for your entrepreneurial endeavors and help point you in the right direction to find other resources for your small business needs. Thanks for joining our online community here at SBA.gov!

Comments:

I think the first thing they should consider is do they have a viable product or service that people want and can they generate revenue/profits from that alone vs. funding. But yes these are 5 ways to go about it if you have a solid product/service to begin with and need capital to get started.
crowdfunding is a great way to start a business. Many people are willing to help build something they believe in or want to see. It provides opportunities for those with great ideas with little money to realize their dream. Great article.
My business is active and having a little difficulty, I was thinking about how a loan from relatives friends. Thanks for your suggestion!
thanks for share. I like this post :)
I tried getting an idea off the ground before but what limited me was the money. It was hard to do my part time job and make my business successful. As much as I hate the idea, I think finding a venture capitalist might be a good option. They have a say in your company once they invest... but at least your company gets off the ground. I found this youtube video that answers a lot of questions about it. http://www.youtube.com/watch?v=0WiJL1kJw-0
your article is accurate and revealing. Bootstrapping (putting dollars back into your company, and not your pocket) can be brutal - but nearly every successful entrepreneur knows sacrifice is necessary (and often the best teacher). Learning to “Avoid Overinvesting” could be #1 best advice of your five ideas for young entrepreneurs.
Good reminder that friends and family are not the only financing source. Although we'd like to think of this group as the most supportive, sometimes their fear is all they contribute.
If you are going to seek angel investors or capital funding the number one thing you must do before asking for resources is have proven sales. It is the scariest thing to do, but it is what separates failures from successes in the business world. If your product or service is good, go out and network and sell as much as you can over a 3-6 month period. Good sales will result in future investors actually putting their money into your business to help it grow.
Thank you for a valuable article. In addition to the traditional financing options that you have listed, I would like to also suggest the following: First, create a conservative cash flow (minimize forecasted revenues and maximize expenses) - most do not have a realistic view of what their working capital needs will be and so underestimate this important requirement. Second, once you have a clear view of working capital needs, what can you do to reduce these expenses? Most are much more variable than appear at first glance. You can stage many start-up costs over time to better match your business revenues. Third, look at your capital costs - do you really need a ______? If you do, can you purchase second hand? Lease or rent? Can you cost share the use of expensive equipment with another company - or even a local university? You don't need to own the assets, just control use of them. Fourth, reach out to your suppliers and negotiate trade terms – this is in essence “free capital” and can be mutually beneficial. Don’t hesitate to share your business plan and strategies with key suppliers. Fifth, once established, if you take credit cards, investigate Merchant Cash Advances – where a provider will essentially purchase your future credit card sales – see Swift Capital for more information. This can be a valuable option if you don’t qualify for traditional bank financing. Finally – and most importantly, make sure that you have a rational business strategy – use a process of Strategic Mapping and a free business development online course that shows you how to use this important tool (5 Steps to Successful Self-Employment). The course is provided by [URL removed], a nonprofit business development resource center.
Good reminder that friends and family are not the only financing source. Although we'd like to think of this group as the most supportive, sometimes their fear is all they contribute. Also, shouldn't we stress the importance of a short on-point "pitch" document/presentation to get the right response from these lenders? Impressing those you want to borrow money from is definitely essential.

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