Starting a business after college

Ask most graduates what the next step is after earning their degree and they'll likely say that it's heading into the workforce and starting their careers. Starting a business after college and becoming your own boss is an alternative to the traditional career mold.

There's just one important wrinkle to iron out: how you'll pay for it. According to a 2022 Skynova study, 47% of startup failures in 2022 were due to lack of financing.

"For a new business, capital is everything, even more so if you're a first-time entrepreneur," says Steve Kurniawan, a marketing strategist at digital marketing agency Nine Peaks Media. Financing capital needs is about taking managed risk, he says, and if you're not willing to take a certain amount of risk, starting a business may not be right for you.

Kurniawan, a serial entrepreneur who launched his first business in 2008, says trial and error are common in the beginning.

The good news is you have multiple choices for financing a startup fresh out of college. Comparing them can help you find the capital you need to make your business launch successful.

Option 1: Get a startup loan

There are many different kinds of business loans. Startup loans are designed just for funding a startup.

For recent college graduates, the main advantage of these loans is that they're easier to qualify for compared to traditional business loans. For example, you can get a startup loan with less revenue and as little as six months in business where a regular business loan will require more revenue and at least one to two years in business.

One potential drawback of startup loans is that you may need to have exceptional credit to qualify for a loan. If you're just out of college and have no credit history yet or a thin credit file—meaning you don't have enough credit history to generate a credit score—a startup loan may be harder to get.

You also have to consider whether repaying a startup loan works with your budget if you're also repaying student loan debt.

"Remember that with new businesses, there can be cases where you won't make any revenue at first or even lose money," Kurniawan says. He advises that if you're choosing a startup loan, to get one with the lowest interest rate possible, which can translate to lower payments.

And, if you're also balancing student loan debt, you could consider consolidating or refinancing your loans to get a lower rate—and potentially a lower payment. Keep in mind that if you extend your repayment period, you could end up paying more in interest, even if your monthly payments are lower. It helps to do the math when considering this option.

Option 2: Borrow from friends and family

Your friends and family may be able to help you with starting a business after college by loaning you the money to get up and running.

If you have this option, it can be appealing because you won't have to worry about having a certain credit score or meeting revenue or other requirements like with a loan from a financial institution. Friends and family may also charge you a more favorable interest rate if they charge anything at all. In some cases, they may want to invest in your business in exchange for a percentage of the profits.

In Kurniawan's case, he borrowed $30,000 from his parents to launch his first business, a fish farm in Indonesia. A potential downside is that your friends and family may not have as much to lend. But that can be a good thing, says Jason Patel, who founded college prep company Transizion after graduating from The George Washington University in 2014.

"You may get a smaller amount of money, but this will help you gauge your ability to save and spend money carefully," Patel says. "This will keep your finances tame and proper before scaling."

If friends and family agree to help with financing a startup, put it in writing. Spell out the following:

• How much you're borrowing
• How much interest you'll pay
• How long you'll take to repay the loan
• How much you'll pay monthly

You can also include any other terms that you mutually agree to. Having a written agreement can help avoid conflicts that could sour your personal relationships.

Option 3: Open a business credit card

A business credit card can be useful for starting a business after college and continuing to grow it once it's off the ground. Patel used a combination of credit cards and personal savings to bootstrap his company in the beginning. He wanted to grow it in the early stages with minimal debt while building credit history.

Business credit cards can help you establish a credit score for your company that's separate from your personal credit score. A strong business credit score could eventually help you qualify for other types of financing for your startup, such as equipment loans, term loans, inventory loans, or lines of credit.

Funding a business using a business credit card is an option for new grads since they can be easier to get approved for than a loan, says Priyanka Prakash, a senior staff writer at online small business lender Fundera."You can qualify for a business credit card even if your business is still in the planning stages."

There are several business credit cards available, so you should shop around to compare terms and features before deciding on one. Take into consideration the APR, annual fees, and benefits like rewards on purchases. Prakash recommends looking for a card that offers a zero percent APR introductory period on purchases if you think you'll need to carry a balance initially. Just remember that you'll need to pay the balance in full before the introductory period ends to avoid incurring interest charges.

Option 4: Start a crowdfunding campaign

Crowdfunding is a newer option for funding a startup but it's worth considering for recent graduates.

Crowdfunding sites such as Kickstarter or Indiegogo allow you to establish a fundraising campaign for your startup. You set your fundraising goal and the people who see your campaign can decide whether they want to contribute and how much.

The upside of crowdfunding is that you're not obligated to repay anything to the people who are helping finance your startup. Instead, you might offer them a different incentive, like free samples of the product your company is selling or your product or service at a reduced price. If your campaign is popular and a lot of people contribute, you could raise the money you need quickly.

While it's typically free to setup a crowdfunding campaign, these platforms do charge listing and payment processing fees that are a percentage (e.g., 3% to 5%) of the funds your campaign raises. And you have to actively market your campaign to attract attention to it. Ultimately, you have to decide if the time and money you have to invest is worth the return, in terms of what you can raise.

Calculate your startup needs carefully

As you explore different ways of financing a startup, be clear about how much money you need.

Kurniawan says to research things like the average marketing spend for startups in your industry, the cost of producing what you plan to sell or buying inventory if you're starting a product-based business, fees for establishing your business as a legal entity, and the costs of setting up a website or e-commerce storefront if you're planning to sell online. All of that can give you a better idea of how much funding is enough to get started. Patel advises leaving yourself wiggle room to cover unexpected costs.

"Take your business budget and multiply it by 2.5," he says. "You don't know what you don't know and you'll likely spend more money than anticipated."

And perhaps most importantly, consider how taking on a business loan fits your budget if you're also managing student loan and other debt. Keeping that in perspective can help you avoid becoming overextended as you grow your new business.