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Funding Your Virtual Paralegal Business

03 Jun 2020 1:57 PM | Cordina Charvis (Administrator)

Start-up capital or working capital is the funding that will help you pay for equipment, software, supplies, etc., for the first year or so of operation.

Finding the capital to start a virtual paralegal business can be challenging for some; considering the cost could be anywhere between $500 -$5,000 or even more. There are several options for pulling the money together, but my personal advice is to put any type of loans, personal, business and credit cards at the bottom of your list. If you are going to start your virtual paralegal business on a full-time basis; you want to avoid launching your practice by going into debt.

This will leave you with few options: savings, grants, partnerships and gifts. Before you gather your finances; you must determine your daily, weekly, quarterly and annual expenses. What if you do not sign a client within the first 6 months or 1 year after you launch; how would you and your business survive?

Firstly, list your start-up expenses such as computer/tablet/laptop, smart phone, task management software, practice management software, website domain & hosting fees, office supplies and marketing. Depending on your practice areas you may have other expenses that are mandatory for operating and delivering your services.

Here are some start-up capital options for funding your virtual paralegal business

Savings – You could use your personal savings that may include retirement accounts or life insurance to fund your virtual paralegal business. But before you empty your personal savings consider the risks and penalties that are associated with them if your business takes a while to return profit. Another option is to actively save as much money as you can each month to reach your start-up goal.

Grants – Per the Small Business Administration (SBA) Federal agencies do not provide grants for starting a home-based business. However, there are several low-interest loan programs that help individuals obtain startup financing, for example:

The FedEx Small Business Grant Contest is a nationwide competition that will award $50,000 in total to six deserving U.S-based entrepreneurs and business owners.

The National Association for the Self Employed (NASE) Growth Grants Program allows business owners to apply for financing a small business need. Past recipients used funds to purchase computers, hire part-time help, and create marketing materials.

Gifts from Friends & Family – Per Nolo, a gift is the simplest way of obtaining business capital. You have no ongoing obligation to the giver (although you should thank the person and try to maintain good relations). A friend or family member might offer a gift of money to help you get started, or you might jump-start the process by asking. Though it might seem impolite to ask someone for a gift of money when you're starting a business, it can make sense.

To document a gift, all that's necessary is a letter explaining that the money is a gift. The giver should keep a copy for tax purposes, to assure the IRS that the transfer wasn't an interest-free loan. You should keep a copy as well. You may receive up to $14,000 each year from any one person as a tax-gift. If you receive more than $14,000, the giver must file a gift tax return (IRS Form 709, U.S. Gift Tax Return).  The IRS gift tax exclusion amount changes annually; check the IRS website for current rates. 

Partnership – Partnerships allow you to take advantage of the skills, expertise, and efforts of more than one person. The risks of the business are diffused across the partners. Each partner is legally liable for the actions of the other partners, including hiring employees, borrowing money, operating business and funding the business. You should also, consider a silent partner where your partner invests all or some of the startup capital and you manage the day to day operation of the business.

Credit Card – A credit card may be a manageable way to finance your business. 

Check your personal credit score before you apply for any business loans. Most financial institutions use your personal credit score when determining if they will lend you money for your new business. If your credit score is low, you should consider working on increasing your scores before starting your business. You may find that you will need credit for business supplies or business loans.

A low-rate credit card may be a viable source of capital for launching your virtual paralegal business, or a good way to eliminate existing higher-rate credit card debt that you or your business already owes.

If you have reasonably good credit, shop for a card with no annual fee and a low interest rate or consider transferring to such card the balances on which you are currently paying higher rates. 

Using a credit card would allow you to purchase some necessary items and give you the time you will need to pay it off monthly. Create a PayPal account; use your PayPal debit card for regular purchases to take advantage of their cash reward program.

Sites such as Bankrate.comCreditCards.com, and CreditCardGuide.com allow you to compare credit card offerings from many different banks and you can apply online. Credit Karma allow you to check your credit report for free.

Bank Loans For those with good credit, a commercial bank can often be a good source of funds to finance a business. The interest rate charged will generally be more favorable than with credit cards.

Before going to see your banker about a loan, be sure to assemble your operating agreement and financial statements for the last several years, including aged accounts receivables and cash flow projections, and the firm’s tax returns. Most banks will not make a loan to a freelance/virtual business entity (PC, LLC, or LLP) without also obtaining the personal guarantee of the business owners, so be prepared to submit personal financial statements and your personal tax returns for the last three to five years, too.

Check with your personal banker or the bank where you have your business account for information on different types of home-based business loans.

Small Business Loans - In limited instances, a Small Business Administration (SBA) loan may be an option for a virtual paralegal business.

The U.S. Small Business Administration does not make loans directly to borrowers, but it can provide loan guidelines and loan guarantees that will induce a commercial bank to make a loan to a borrower. There are special programs to benefit women and minority business owners, those with disabilities, and businesses in rural communities. But because you must meet both the banks and the SBA’s lending requirements, be prepared to jump through twice the hoops of a normal bank loan. To find out if an SBA loan might be right for you, check out the SBS's loan search tool.

My personal advice is to determine how much start-up cost you will need in addition to the first year’s expenses and save aggressively over the next 6 months to 1 year before launching your business. Another option would be to start your business on a part-time basis as well as accepting contract assignments to manage your cash flow.

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