By 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 tapped her personal savings. “Downsizing was what made it possible for me to go out on my own,” says Yaeger, the former chief compliance and finance officer at Wakefield Asset Management.
Yaeger, who is divorced, bought a condo with cash from her home sale and had enough proceeds to buy office equipment, pay for health insurance, hire a coach and bookkeeper and sign up for a women-focused co-working space. “Theoretically, my business can be run from my spare bedroom,” she says. “But I’ve really found that I needed to be out and about. And being in the co-working space is great support and networking. There’s a lot of women there building businesses; some have become clients and have referred me to others.”
To fund her second-act business coaching new writers through the self-publishing process — Nowata Press & Consulting — Dana Ellington, 54, of Kennesaw, Ga., pulled $30,000 from a retirement account to cover its initial costs. She started the company as a side gig while working full-time as an office manager.
Tapping Savings to Start a Business
“I was not ready to take that leap full-time until the pandemic brought so many things into perspective,” says Ellington. “The driving force was: I’m in my fifties and if I don’t do it now, when am I going to do it?”
She crunched the numbers and knew about the tax penalties she’d owe to close that retirement account. But Ellington has another retirement account she plans to fund again once she starts making money with her business.
Guadalupe Hirt and Barbara Brooks, who run SecondActWomen — a Denver-based company helping women in their 40s and older start businesses, pivot careers and stay employed — used their personal funds to get their startup off the ground.
Funding a business in midlife these days can be challenging, and some methods are more fraught than others. SCORE, a nonprofit affiliated with the Small Business Administration (SBA), publishes a free e-guide called “Where’s the Money? 10 Most Popular Financing Sources and How to Qualify.”
If you’re in decent financial shape and have a tight business plan, you have numerous options to get money for a new company, including ones that didn’t exist a few years ago.
Here are the main alternatives on how to find money to start a business:
Personal savings. Most entrepreneurs tap their savings to launch. But before you start diverting savings into your business, I advise setting aside at least a year’s worth of money for fixed living expenses, including your mortgage and insurance essentials. That’s because in the early days of a business, you may have to waive a salary for a few months until you gain a toehold and income starts coming in.
Fortunately, starting a midlife business doesn’t have to require gobs of cash these days.
Starting a Business Can Cost Less Now
“The costs of forming business have collapsed in many sectors, so the tap into personal savings can be minimal, at best. You can spend a lot less than ten thousand dollars to to get off the ground,” says Jon Eckhardt, a University of Wisconsin School of Business professor and editor- in-chief of the Entrepreneur and Innovation Exchange (EIX) of the Schulze School of Entrepreneurship at the University of St. Thomas in Minneapolis. (The Schulze Foundation is a funder of Next Avenue.)
Friends and family. If you’ll go this route, be straight up about the terms of any loan or grant and put everything in writing. Money can wreak havoc on family ties. Consider borrowing the cash for a certain period, say three years, with a low interest rate of around 3% (lower than a bank loan) or maybe no interest at all, and with some possible wiggle room if you need it.
Customer financing and consulting income. If your business will sell products, to raise money, you can sell some of them before you’ve made them, Eckhardt suggests. Also, he adds, “you can earn early revenue by selling your time through consulting; use this revenue to finance the business and learn about your customer needs.”
Banks and credit unions. Banks are often frustratingly difficult when it comes to small business lending. Loan officers tend to make decisions based on an applicant’s current, not future, income. And if you’re just starting off, ahem, income is not exactly flowing in.
You’ll need a firm business plan and a top-notch credit record to pass muster. Even then, expect lots of hoops to jump through.
Look for SBA-guaranteed loans. You can research potential lenders by checking the “Local Resources” page on the agency’s website. SBA-guaranteed bank loans tend to demand a lower down payment than others, and monthly payments may be more manageable. Generally speaking, you’ll need to demonstrate that you’re investing in your business or have tangible assets like real estate to guarantee the amount borrowed.
Usa.gov, a federal government site, has info on short-term microloan and small-business loan programs in your state.
Angel investors and venture capital firms. These make up the holy grail for many startups, but they’re hard to score, particularly for women. Also, angel investors (individuals funding startups) and venture capital firms tend to have short time frames for expected results. In many cases, you must hand over partial ownership in exchange for the funds.
For more, check out the SBA’s Small Business Investment Company program (SBIC) for SBIC loans typically starting at $250,000.
Economic development programs. These are offered through cities, counties and states, but finding one you can tap might take a little sleuthing. The SBA’s economic development department resources can help you decide if this might be an avenue for you.
Grants. Go to 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 generally raise tiny sums on crowdfunding sites like Kickstarter, Indiegogo and GoFundMe, but their money can be enough to give you some early oomph. Look on these sites for businesses like yours with crowdfunding campaigns and check out how much they’re looking to raise as a guide for your own financing.
Your funders here are not looking for a payback, but rather to help you succeed, and it can be a fun way to raise grassroots awareness of your product or service and get feedback. Each of the big crowdfunding sites handles the funding process differently, and all charge fees.
Under the auspices of crowdfunding there is a nascent, niche avenue starting to gain attention: equity crowdfunding.
“Within crowdfunding, there’s a big difference between rewards-based crowdfunding and equity crowdfunding,” says Daniel Forbes, an associate professor at the Carlson School of Management of the University of Minnesota and a senior editor on the EIX Editorial Board of the Schulze School of Entrepreneurship at the University of St. Thomas.
“Rewards-based crowdfunding involves soliciting donations from people in exchange for some goods or services that will be made available at a future date. This has been an effective approach for entrepreneurs in cultural industries, like moviemakers or musicians,” Forbes says. “Equity crowdfunding, on the other hand, involves selling equity in your firm, and this is a more strictly regulated process.”
Republic, for example, lets an investor — not just a well-to-do one — 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 generally have time to let your company grow. That means you have a longer runway to test the market, experiment and maybe change your business model.
Home equity line of credit (HELOC). If you have considerable equity built up in your house and a credit score north of 700, this route may be a decent choice. The funds are usually taken as a lump sum that you pay off over time. And interest is not sky high. The average HELOC rate is currently around 3.88%, according to Bankrate.com.
Credit cards. These are tempting and easy to use for start-up expenses, but be super cautious. Most credit cards have double-digit interest rates on balances that roll over month to month. If you want to go this route, shop for plastic with the lowest rates and best terms.
Retirement savings. Although Ellington was confident about cashing out retirement funds, generally, you don’t want to dip into your employer’s 401(k) or your IRA to launch your business (or for any other reason besides retirement). Not only will you owe income taxes, you’ll lose the tax-deferred compounding. And, if you’re younger than 59½, you’ll owe tax penalties.
Using a Retirement Plan for a Business Launch
That said, if you have a solo 401(k) retirement plan set up for your startup, you’re allowed to borrow against it. The loan must be repaid within five years of the date you receive the loan proceeds. Loans are limited to 50% of your vested account balance or $50,000, whichever is less. You will pay interest that is not tax-deductible. You’ll also miss out on potential returns that the money would have earned if it had stayed invested.
But keep in mind that tapping these savings assets can be chancy, particularly if you are nearing retirement age and the time to restore your savings is dwindling.
“Closing out the [retirement] account didn’t really bother me,” Ellington says. “I know a lot of people say you’ve got to plan for retirement, you’ve got to have the money, And in the back of my mind, I guess I always see myself as working until I die. I am doing what I enjoy, willing to work harder at it and I’m in it for the long haul. I’ve made it this far, and I trust myself to make it.”