NerdWallet's Small Business Funding Hacks from People Who've Used Them

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Getting small-business funding can be a difficult process, especially for first-time entrepreneurs. So we asked two small business owners who’ve gone through the process to share their financing hacks.

Of course, what worked for them may not work for you. But their stories could help you form a plan to fund your own business.

Tap Your 401(k) If It's Worth the Risk

The odds of small business success were against Keitra and Keith Smith when they started Westview Pizza Cafe in Atlanta two years ago. Keith had just been laid off while Keitra was a pregnant housewife without business ownership experience.

“All of those were red flags,” says Keitra, who acknowledges that getting into the risky restaurant business didn’t help matters. “Everyone said that’s not the time to go for a bank loan or start a business.”

The Smiths decided Keith would borrow from his 401(k) to get the business off the ground. It’s a risky option for many, so make sure it’s going to work for you. When you take a loan from your 401(k), you can only borrow up to 50% of your vested account balance or a maximum of $50,000, whichever is less. The loan must be paid back within a specific time frame, usually five years. 

The benefit of this option is you’ll be paying interest to yourself, not a lender. However, if your business isn’t successful and you can’t pay back the amount you borrowed, the loan will be considered an early withdrawal. You’ll then owe taxes and penalties on the amount you failed to pay back.

Before you decide to borrow from your 401(k) to fund your business, assess the viability of your business plan and consult a mentor or expert. To protect your personal finances, consider how much money you have in an emergency fund and how many years you are from retirement. It’s a risk that could pay off, says Dmitriy Fomichenko, founder and president of Sense Financial Services LLC. But if your business fails and you don’t have the money to pay back a loan, your nest egg will take a hit.  

Use Several Funding Streams

Westview Pizza Cafe is now thriving in its second year. The Smiths’ small business success is a credit to extensive research into alternative financing options. 

“The information is out there, but you really have to look sometimes,” Keitra says. To support the cafe after its initial launch, Keitra and Keith were able to get personal loans from family members and a loan from the online lender Kabbage, which can be a good source if you have bad credit or need cash fast. However, Kabbage has some of the highest annual percentage rates among online lenders.

You can compare different online lenders on NerdWallet’s small business loans guide.  

Most recently, the Smiths pursued a successful community funding campaign through The Village Micro Fund, which provides startup capital, business consulting, and support to Atlanta’s underdeveloped areas. Because the lending guidelines of microfunds are more flexible than traditional banks, it’s easier for entrepreneurs in underserved communities to get approved for financing. Microfunds also provide additional support and guidance to help borrowers succeed in small business funding.

Try a Small, Initial Loan First 

If you’re planning to establish business credit or develop a relationship with a lender, try borrowing small amounts of money first, says Eric Henry of Summit Wine Tastings, a wine promotions agency in Chicago. The former public school educator originally launched his business five years ago through self-funding and angel investing.

When he went through initial funding rounds, he got a small loan from Lending Club. He made regular payments and cleared the debt within a year. “Once I did that, they saw I was going to be a good business partner for them,” Henry says. He soon secured a second loan for a larger amount and a longer term.

“I think it helped me to establish credibility with them first,” he says.