Through Kerry Hannon, Next avenue
In April 2021, when Jenny Yaeger, 55, launched her Denver-based accounting and financial consulting firm for small and medium-sized businesses, ClariFI Business Solutions, she drew on her personal savings. âThe downsizing allowed me to get started on my own,â says Yaeger, former head of compliance and finance at Wakefield Asset Management.
Yaeger, who is divorced, bought a condo with the money from the sale of her house and had enough money to buy office equipment, pay for health insurance, hire a coach and accountant, and enroll in a co-working space focused on women. âTheoretically, my business can be run from my spare bedroom,â she says. âBut I really found that I needed to be outside. And being in the co-working space is great support and networking. There are a lot of women out there starting businesses; some are became clients and referred me to others. “
To fund his second act business, coaching new writers through the self-publishing process – Nowata press and advice – Dana Ellington, 54, of Kennesaw, Ga., Withdrew $ 30,000 from a retirement account to cover her upfront costs. She started the business as a backup while working full time as an office manager.
Harnessing savings to start a business
âI wasn’t ready to take that full-time jump until the pandemic put so many things into perspective,â Ellington said. âThe driving force was: I’m in my 50s and if I don’t do it now, when will I do it? ”
She calculated the numbers and was aware of the tax penalties she would have to pay to close that retirement account. But Ellington has another retirement account that she plans to refinance once she starts making money with her business.
Guadalupe Hirt and Barbara Brooks, running SecondActWomen – a Denver-based company that helps women in their 40s and older start a business, pivot their careers and stay employed – used their personal funds to launch their startup.
Funding a business in its 40s these days can be difficult, and some methods are more cumbersome than others. SCORE, a nonprofit organization affiliated with the Small Business Administration (SBA), publishes a free electronic guide called “Where’s the Money?” The 10 most popular sources of funding and how to qualify â.
If your financial situation is decent and your business plan is tight, you have many options for getting money for a new business, including those that weren’t there a few years ago.
Here are the main alternatives for finding money to start a business:
Personal savings. Most entrepreneurs use their savings to get started. But before you start diverting your savings to your business, my advice is to set aside at least a year of cash for fixed living expenses, including your mortgage and insurance. This is because at the start of a business you may have to forgo a salary for a few months until you get a foothold and income begins to flow in.
Fortunately, starting a business in your 40s doesn’t need a lot of money these days.
Starting a business can be cheaper now
âThe costs of starting a business have collapsed in many industries, so the use of personal savings may be minimal at best. You can spend a lot less than ten thousand dollars to get started, âsays Jon Eckhardt, an academic Professor at the Wisconsin School of Business and editor of the Entrepreneur and Innovation Exchange (EIX) at the Schulze School of Entrepreneurship. University of St. Thomas at Minneapolis. (The Schulze Foundation is a Next Avenue funder.)
Friends and family. If you go this route, be clear about the terms of any loan or grant and put everything in writing. Money can turn family ties upside down. Consider borrowing money for a period of time, say three years, with a low interest rate of around 3% (lower than a bank loan) or perhaps no interest at all, and with a margin of maneuver possible if you need to.
Client financing and consulting revenues. If your business sells products, to raise money, you can sell some before you make them, suggests Eckhardt. Additionally, he adds, âyou can generate early income by selling your time through counseling; use this income to finance the business and know the needs of your customers â.
Banks and credit unions. Banks are often extremely picky when it comes to lending to small businesses. Loan officers tend to make decisions based on the applicant’s current and not future income. And if you’re just starting out, um, the income doesn’t exactly flow.
You will need a strong business plan and a top-notch credit history to be successful. Even then, expect a lot of hoops to jump.
Look for loans guaranteed by the SBA. You can research potential lenders by looking at the “Local Resources” page on the agency’s website. SBA-guaranteed bank loans tend to require a lower down payment than others, and monthly payments can be more manageable. Generally speaking, you will need to demonstrate that you are investing in your business or owning tangible assets such as real estate to secure the amount borrowed.
Usa.gov, a federal government site, has information about short-term microcredit and small business loan programs in your state.
Angel investors and venture capital firms. These are the holy grail for many startups, but they’re hard to tag, especially for women. Additionally, angel investors (individuals funding startups) and venture capitalists tend to have tight deadlines for expected results. In many cases, you must give up partial ownership in exchange for the funds.
To learn more, check out the SBA’s Small Business Investment Company (SBIC) program for SBIC loans typically starting at $ 250,000.
Economic development programs. These are offered in cities, counties, and states, but finding one that you can access can take a bit of time. Resources from the SBA’s Economic Development Department can help you decide if this might be an avenue for you.
Subsidies. Visit the federal government’s Grants.gov site for information on more than 1,000 federal grant programs. (Grants do not need to be repaid.)
A new form of crowdfunding for entrepreneurs
Crowdfunding sites. Virtual fundraising campaigns usually raise tiny amounts of money on crowdfunding sites like Kickstarter, Indiegogo, and GoFundMe, but their money can be enough to give you a little oomph. Search these sites for companies like yours with crowdfunding campaigns and see how much they are looking to raise as a guide for your own fundraising.
Your funders here aren’t looking for a return on your investment, but rather to help you succeed, and this can be a fun way to build awareness about your product or service and get feedback. Each of the major crowdfunding sites handles the fundraising process differently and all charge a fee.
Under the auspices of crowdfunding, there is an emerging niche avenue that is starting to gain attention: equity crowdfunding.
“Within crowdfunding, there is a big difference between reward-based crowdfunding and equity-based crowdfunding,” says Daniel Forbes, associate professor at the Carlson School of Management at the University of Minnesota and editor. of the EIX Editorial Board of the Schulze School of Entrepreneurship at the University of St. Thomas.
“Reward-based crowdfunding involves soliciting donations from people in exchange for certain goods or services that will be available at a future date. This has been an effective approach for entrepreneurs in cultural industries, such as filmmakers or musicians.” , Forbes said. “Equity crowdfunding, on the other hand, is all about selling shares in your business, and it’s a more strictly regulated process.”
Republic, for example, allows an investor – not just a wealthy one – to invest in private startups that have been meticulously vetted, with as little as $ 10 or as much as $ 100,000 per investment.
Unlike a traditional crowdfunding platform, people who invest through equity crowdfunding expect a return, but you usually have time to let your business grow. This means you have a longer track to test the market, experiment, and perhaps change your business model.
Home Equity Line of Credit (HELOC). If you have built up considerable equity in your home and a credit score north of 700, this route may be a decent choice. Funds are generally viewed as a lump sum that you pay back over time. And the interest is not at the highest. The average HELOC rate is currently around 3.88%, according to Bankrate.com.
Credit card. These are tempting and easy to use for startup expenses, but be very careful. Most credit cards have double-digit interest rates on balances that roll over from month to month. If you want to go this route, buy plastic with the lowest prices and the best terms.
Pension saving. While Ellington was confident about cashing in retirement funds, in general, you don’t want to tap into your employer’s 401 (k) or your IRA to start your business (or for any reason other than retirement). . Not only will you owe income tax, but you will lose the tax-deferred composition. And, if you’re under 59 and a half, you’ll have to pay tax penalties.
Using a retirement plan to start a business
That said, if you have a 401 (k) solo retirement plan in place for your startup, you are allowed to borrow against it. The loan must be repaid within five years from the date you receive the loan proceeds. Loans are limited to 50% of your acquired account balance or $ 50,000, whichever is less. You will pay non-tax deductible interest. You will also miss out on the potential returns the money would have earned if it had stayed invested.
But keep in mind that tapping into those savings holdings can be risky, especially if you are nearing retirement age and the time to replenish your savings is dwindling.
“Close the [retirement] account didn’t really bother me, “says Ellington.” I know a lot of people say you have to plan for retirement, you have to have the money, and in the back of my mind I guess I still see myself work until my death. I do what I love, I’m willing to work harder, and I’m here for the long haul. I’ve made it this far and I trust myself to get there. “