There’s a myth that entrepreneurs sometimes buy into that suggests they write a business plan and investors magically appear to put up seed money for their ideas. 

That pretty much never happens.

In most cases the most likely investor for your initial seed money is you.  That’s right you, the last person you would ever think has any money to invest.  Most entrepreneurs end up getting their initial seed money from sources like credit cards, lines of credit, home equity loans and similar products based on their personal credit. 

Let’s take a look at the most popular sources for seed money that entrepreneurs typically use.  We listed these in order of viability to most entrepreneurs ranging from the “easiest to get” to the “hardest to get”. 

Credit Cards

Credit cards are the fastest way to get startup capital for your business because they are typically easy to apply for and provide immediate access to cash, albeit in limited supply. The average business has far more costs from the onset than it has income, so naturally you’re going to need a little bit of spending cash to get the ball rolling.

However, don’t mistake credit for “having cash”.  Certain items that you need may require credit cards to fund, like supplies, materials, and maybe even a little bit of marketing. But if you are using your credit card to finance big items like salaries and rent payments, it’s unlikely that credit cards are going to be a very good option.

A good rule of thumb for using credit cards to finance your companies would be “Is this charge going to result in more income within the next 90 days?”  If not, consider the fact that you’re going to be paying fees against this charge for at least that long and if you’re not on a path to generating more income, how is this charge going to pay for itself?

Charge Cards

Unlike credit cards, charge cards require you to pay the whole balance at once at the end of a fixed term (typically 30 days).  The weapon of choice among most entrepreneurs is an American Express Business Card since it’s typically issued to most business without much hassle and it’s a great all around tool to help manage charges for your business.

More importantly, it has no pre-set spending limit.  Now that doesn’t mean you can go around spending like a drunken sailor, it simply means that they offer a great deal of latitude with your limits. 

Charge cards are also good to help create a little bit of a cash “float” in your business.  A float is typically referred to as the time between when you incur a charge (on your card) and when you actually pay off that charge (when the bill arrives).  By using a charge card you can give yourself roughly 30 days to collect the income on items you may have had to pay up front for (like advertising or materials).

Home Equity Loans

The equity in your home can be used for a lot more than finishing your basement!  For most entrepreneurs, their home equity is the largest, easiest to access store of capital they have.

Interest rates on home equity loans are also quite low in most cases, so they can be attractive alternatives to getting a business line of credit or using other types of capital. 

Unlike other types of credit sources, home equity loans are typically used to finance personal items like the founder’s salary.  The reason a home equity line might be used for this purpose is because the founder is going to need to keep paying bills while the company is growing, and a home equity line is the cheapest way to do this.

Lines of Credit

A line of credit acts just like a credit card, except for the fact that it tends to be offered in higher amounts (north of $10,000) and is often secured with some sort of asset (like your home, or your business collateral). 

Most businesses use a line of credit to help them manage cash flow and pay for items that require a large up front payment where capital isn’t immediately at hand.  Organizations like the Small Business Association (SBA) often help upstart businesses get their initial lines of credit established for working capital.

If you intend on operating a business at all, you’ll probably want to establish a line of credit to help manage your expenses.  Again, don’t mistake a line of credit with “a big pile of cash that you can blow”.  Lines of credit are only good for expenses that have some path to generating more cash in the not-too-distant future. 

Bank Loans

Getting a bank loan for a business is kind of a Catch-22.  Banks typically only want to lend money to companies that have some sort of collateral yet at the same time most new businesses don’t have any collateralized assets when they form.  If it sounds like a bit of a pickle (or some other rotten vegetal metaphor) than you’re right – bank loans aren’t much of an option for most businesses.

Business bank loans made a lot more sense when your typical business had lots of hard assets like factories, real estate and typewriters that a bank could sell if everything fell apart.  Nowadays companies may have little more than a few laptops and an Internet connection which gives a bank nothing to sell in order to secure a loan.  It’s really not the bank’s fault, and it’s certainly not yours – times have just changed.

For this reason a bank loan will only likely be an option if you are intending on financing a large capital-intensive item that you think the bank will be able to sell if you go out of business.  If you simply need the money to finance stuff like salaries, marketing and rent, you’re probably looking in the wrong place.

Summary

If you’re like most entrepreneurs, you’re going to finance your new company with a handful of these items – perhaps a couple credit cards, a charge card, and some home equity – in order to get things moving.  If it feels like that’s a lot of risk to get your idea moving, well, it is!  That’s why entrepreneurs are so well rewarded when their business takes off – very few people are willing to assume this type of risk.