How to fund a side hustle

by mcnmm
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Nowadays, more American workers than ever have a side hustle — an additional job (typically some kind of gig work or a profitable hobby) alongside their main form of employment. But in order to make it grow, understanding how to fund a side hustle is vital.

Taking on extra work to make ends meet or have a little extra spending money is especially common among younger generations: Nearly half of all millennials have a side hustle of some kind. That could mean one of the more lucrative side hustles like web development or design, or even driving for a rideshare service.

Let’s say your side hustle becomes successful, and you decide it’s time to invest more in your operations. Maybe you need a website redesign, an influx of new inventory, or a new piece of crucial equipment. This is the first step of turning your side hustle into a legitimate business — one that could replace (or at least supplement) your day job.

Of course, these investments require capital.

If you need an outside hand in obtaining funding for a side hustle, it’s time to explore your options.

Related: Start a lucrative side hustle — 10 best hobbies that make money

Establishing your side hustle as a business

First thing’s first: To fund your side hustle like a business, you need to treat it like a business.

Funding a side hustle starts with taking the steps to turn your hustle into a real business — even if it’s still something you do in your spare time.

Put it this way: If you see your side hustle as little more than a hobby, why would anyone else see it differently?

Let’s run through some of the steps you can take to legitimize your side hustle in the eyes of investors, lenders, credit bureaus, and even family members.

  1. Write a business plan.
  2. Register your business.
  3. Separate your business and personal finances.
  4. Build business credit.

Disclaimer: This content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

1. Write a business plan

Writing a long, detailed document — the Small Business Administration recommends that you put together a 30- to 50-page plan — can feel intimidating. And if you’ve gotten this far without a business plan, it may seem superfluous.

Here’s the thing: In reality, a business plan can be as little as one page.

And it’s not set in stone — you don’t need to predict the exact future of your side hustle here and now.

A business plan is a living document that is subject to change.

Plus, there are benefits to having even a rough outline of where your side hustle is today, and where you expect it to be down the road. Most importantly, for our purposes, you can share your business plan with potential investors, lenders and other interested parties.

There are plenty of resources online that can help you put together a business plan, but know that most good plans have the following sections:

  • Executive summary
  • Company overview
  • Market analysis
  • Organizational structure and stakeholders
  • Description of products or services
  • Marketing and sales plans
  • Financial plans and projections
  • Any additional data points, permits, documents, and information

Here’s a more in-depth explainer of how to put a business plan together.

Related: A quick-start guide to writing a business plan for the first time

2. Register your business

The process of registering your business is not one-size-fits-all. The exact steps depend on what kind of side hustle you’re running, how big it is, and what state you live and operate in.

For personalized advice, it may be helpful to talk to a local business attorney or accountant. The basics, however, are as follows:

Choose a business structure. If you’ve been operating a business without a thought given to your business structure, you’re a sole proprietor. Other structures that require filling out some paperwork include LLCs, Partnerships, S-Corps, and C-Corps.

Choose a location. If you’ve been operating your business out of your home, that’s fine — you can use this as the business location that you submit to business directories and to receive tax filings or bank statements.

Register your business name. Choosing and registering a business name is easy if you file a “Doing Business As” or DBA with your state or county clerk’s office.

Get your EIN. An Employer Identification Number, or EIN, is the business equivalent of a Social Security Number. Get yours for free from the IRS, even if you don’t plan on hiring employees anytime soon.

There are other steps you can take, such as register with state and local agencies as you did at the federal level, or apply for necessary permits and licenses.

Related: Starting an online side hustle — Considerations and checklist

3. Separate your business and personal finances

Credit Card

If you’ve been making money from your side hustle and depositing the earnings directly into your personal bank account, we don’t blame you. It’s a common course of action.

But if you want to think of your side hustle as a business, it’s time to separate your business and personal finances.

There are a few important reasons for doing this. One is that it will make tax season less of a headache, as you’ll no longer need to dig through your personal financial statements for each business expense and deposit. Another is that it helps establish a legal separation between you and your business, in case someone takes legal action against you.

There are two ways to separate your business and personal finances. One is to open a business bank account — often a checking account.

The other is to obtain a business credit card. There are many free and no-fee options for both products, including online-only bank accounts that take little time to set up.

There’s another benefit to having separate business accounts — opening and using these accounts helps you build business credit. That’s the last step we’ll discuss in terms of establishing your side hustle as a business.

Related: 5 ways business credit cards can help startups

4. Build business credit

At the end of the day, building an excellent business credit score — a number that is separate from your personal credit score — is an important part of securing long-term, affordable financing.

Nearly all the steps you’ve taken to establish your side hustle as a business will also establish a business credit file, which credit bureaus such as Dun & Bradstreet, Experian and Equifax will continue to add to as your side hustle grows.

Very simply: Responsible spending on your business credit card and establishing trade credit with vendors are two easy ways to add to your business credit history.

Once you’ve laid the foundation of turning your side hustle into a legitimate business, it’s time to start looking into what funding options you might qualify for.

How to fund a side hustle

Now that you know how to start down the path to treating your side hustle like a real business, let’s explore some options for funding it.

  • Bootstrapping.
  • Business credit cards.
  • Alternative lending options.
  • SBA loans.
  • Grants.

There are a variety of ways you can fund the growth of your side hustle. Some options will be more readily available, while others will require greater effort.

Bootstrapping

While we’ll discuss debt financing options such as loans and credit cards, the best source of funding for your side hustle is yourself. That’s why the first step in funding a side hustle is bootstrapping.

Bootstrapping is when you use your existing resources, rather than outside help, to build your business. It means leveraging your personal savings, or low-cost (hopefully free!) loans from family or friends.

You can also look into crowdfunding platforms, from well-known sites such as Indiegogo or Kickstarter to more niche options. Unless you have grand ambitions for your side hustle that need to be realized immediately, this kind of slow-but-steady funding is a responsible and safe way to go.

It’s worth mentioning that you can also use a personal loan to fund your side hustle. Typically, using a personal loan to fund a business venture should be more last-resort than first-choice, but for purposes of a side hustle, it’s not a bad option.

Personal loans typically have lower APRs than business loans, don’t require you to secure them with collateral, and are flexible in terms of use cases.

To get the best deal possible on a personal loan — or any loan — keep an eye on your personal credit. Lenders will almost always review your personal credit score even if you’re funding a business venture.

Related: Top crowdfunding platforms of 2020

Business credit cards

At this point, you should have a business credit card in your back pocket. Now it’s time to see your credit card for what it is: a loan in miniature.

Using a business credit card to fund your side hustle is a good way to give yourself a little extra breathing room when it comes to paying off what you owe.

You’ll also accrue cashback, points or other benefits.

If you’ve got excellent personal credit and foresee some large expenses in your side hustle’s near future, look into obtaining a credit card with a 0% introductory APR. These cards don’t rack up any interest charges for the life of the offer (typically nine to 12 months) as long as you remain in good standing by making minimum payments. That’s essentially an interest-free loan for up to a year, which is an unmatched financing tool.

Alternative lending options

If you decide that you need larger chunks of capital than what your savings or a credit card can supply, it’s time to look into business financing options such as startup business loans and lines of credit.

There are a variety of debt financing options, with various typical interest rates, repayment terms, collateral requirements and other factors to consider. Many of these loans will come through online lenders, which have less stringent requirements and are more willing to lend to small businesses than traditional banks.

Some of the most common options that may be useful to fund a side hustle include:

Short-term loans. A term loan is what you think of when you think of a loan — a lender extends you a set amount of money, which you pay back in installments, plus interest. Short-term loans are easier for new businesses to qualify for than long-term loans. They come with repayment periods between three and 18 months, and can sometimes fund in as little as one day.

Lines of credit. A line of credit (LOC) gives you access to a pool of money that you can draw from and pay back as needed. It’s similar to a credit card, if your credit limit was upwards of $1 million for some products. Business owners prize LOCs for their flexibility — often, once a lender approves you, you can keep the LOC on hand for a rainy day for as long as you’d like.

Equipment financing. If you need a particular piece of equipment, such as a vehicle, to run your side hustle, you can look into equipment financing. Here, the lender extends you the exact amount of funding you need to purchase a piece of equipment. The equipment itself acts as collateral — meaning that if for some reason you are unable to make your payments, the lender can repossess the equipment.

Inventory financing. Similar to equipment financing, if you see an opportunity for a timely investment in inventory (maybe your supplier offers a sudden but expiring discount on much-needed inventory), a lender can extend you the money needed to buy at a moment’s notice.

Generally speaking, interest rates and terms on short-term loans and other startup loan options are higher than they would be for larger, well-established businesses. But if you see your side hustle as a good long-term investment, these forms of financing can not only keep your venture afloat while you work out the economics — they’ll help you build needed business credit as well.

SBA loans

When you’re ready to think of your side hustle as a true business venture, look into SBA loans.

The Small Business Administration’s loan program is the holy grail for many small business owners. The SBA partially guarantees various loan products, from startup microloans to multi-million dollar loans for expansion and improvements. These loans have low-interest rates and long repayment terms.

For example, SBA Microloans (which can be for as little as $500 and as much as $50,000) are geared towards new businesses, as well as underserved entrepreneur populations such as women, minorities and veterans.

Another popular SBA loan product is the 7(a) loan, which can be for dollar amounts as large as $5 million with repayment terms as long as 25 years. You can use these loans for a wide variety of business purposes, such as buying real estate, equipment expenses and working capital.

No matter what SBA loan product you’re looking for, you’ll need to meet some rigorous standards, come prepared with documents such as a business plan, and be ready for an extended application process that can take weeks or months.

For more information on SBA loans, visit the SBA’s website.

Grants

It’s worth mentioning that there are non-debt financing options out there for your side hustle. The most obvious source of this kind of funding is a business grant.

A grant is, essentially, free money for your business.

There may be some strings attached in regards to how you use that money, and the application process will likely be fiercely competitive (you won’t be the only person interested in free money, after all). But considering the pay-off, it’s worth doing your research and seeing what grants might be right for you.

As you develop your side hustle into a business, keep your eye on grants available through federal, state and local government agencies.

There are also corporate grants available, from companies such as FedEx, Etsy and Intuit.

In addition, many governmental, as well as non-governmental organizations, look to serve entrepreneur populations like women, minorities and veterans with grants as well.

Check out this extensive list of grant options to get you started. Be prepared to make a compelling case for why your side hustle deserves this infusion of capital.

The bottom line on funding a side hustle

Acquiring the funding for a side hustle is a bit like getting the money together to pay for any venture — a fun hobby, a vacation, or any other personal expense. The difference, of course, is that with a side hustle you might end up seeing a real return on your investment.

If you take the time to make a plan, crunch the numbers, and think of this as more than just a pastime, you’ll likely find the financial opportunities you need to bring your hustle to the next level.

Editor’s note: Show people that you mean business with a professional website. With GoDaddy’s Websites + Marketing solution, you can pick from designs tailored for your industry, send out emails with email marketing, and manage your business profiles on Google, Instagram and so much more. And you can do it all from any device, be it your phone, desktop or tablet.

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