3 Ways to Fund a Small Business or Startup in Texas
Starting a business can be a tricky process for a variety of reasons. From deciding whether to start from scratch or purchase part or all of an existing business, to determining where to incorporate, to choosing the appropriate type of business entity, there are a lot of decisions that can have a lasting impact on whether your business takes off and how well it operates. One of the most basic hurdles a new business must overcome is securing funding. For a new business, you may need to hire employees, purchase or rent equipment, secure a location, market your business, and perhaps even pay yourself a living wage. Below we discuss the pros and cons of some of the typical sources of funding for new businesses. Contact a Houston business law attorney with additional questions or for help establishing your business in Texas.
Small Business Loans
If you can qualify for a loan, the bank is generally the first and best source for funding. Small business loans are some of the cheapest loans available, with interest rates currently around 5 to 8 percent. They are often long term, extending an average of 10 years to allow business owners lower monthly payments. The National Information Center’s Institution Search Tool is a useful way to find a nearby Texas bank.
Small business loans are, however, notoriously difficult to qualify for. You will need a powerful credit score (often 700 minimum), a clear and strong business model, and, often, prior business successes to show the bank. New entrepreneurs are often rejected by the large banks, and while there are lending companies that have more lax credit standards, it can be difficult to determine whether these lending companies are legitimate or predatory. Make sure you retain a competent business law attorney to help review potential lending agreements with any lesser-known institutions.
Friend and Family Investment
Small business owners often start with loans from friends and family. People who already wish you well may be easier to convince of the viability of your business, and they will likely be more flexible as to repayment. But approaching friends and family can be intimidating, and failure to repay can lead to hurt feelings and damaged relationships. The best approach is to have a strong business plan along with set repayment options. Friend and family investments can take the form of loans or equity investments. There are simplified security options for new businesses, such as so-called “SAFE” notes (simple agreement for future equity), that may be the right fit for your business model. A business lawyer can help you determine the best structures for friend and family funding.
The modern era has given entrepreneurs the ability to be seen by much larger pools of potential investors, allowing for larger-scale investment than small business owners of the past could have expected. Crowdfunding sites like Indiegogo and Kickstarter give you the ability to pool small investments from contributors around the world which, with the right marketing campaign, can meet or exceed the investments available from other sources. Anyone can create a crowdfunding campaign, which does mean that you will need to find a way to make yours stand out. Some experts estimate that between 69 and 89 percent of crowdfunding projects fail to reach their goals. Alternatively, if you have a strong social media following, you can run your own crowdfunding campaign drawn from your followers.
Whichever method you choose to source funding, it is essential that you consult a business lawyer to ensure your financing is legally sound, and that you limit your potential liability should anything go awry.
For assistance with a business law-related issue in Texas, contact the seasoned, professional, and detail-oriented Houston offices of the Stephens | Domnitz | Meineke PLLC for a consultation at 713-463-6000.