All small businesses start with something in common: they devour cash. They need cash for inventory, office space, insurance, legal fees, business licenses, remodeling costs, and the list goes on. Because very few start-ups can secure equity financing from venture capitalists, most business owners must get needed cash from a combination of personal assets and debt. If you’re thinking about starting a small business, here’s a short list of financing sources to consider:
* Personal assets. The advantages of tapping your own bank account are obvious. You don’t have to pay the money back, you don’t incur interest, and you don’t have to grovel at a loan officer’s feet. The disadvantages may not be as clear. Other priorities – college savings, retirement plans – can get shoved aside. So if you’re going to use your own assets, set limits. Decide how much risk you’re willing to incur, and don’t deviate.
* Friends and relatives. Convince your brother and golf partner that your idea is the greatest thing since sliced bread, and they may provide seed money for your new enterprise. If they lend you cash, be sure to set up a formal agreement spelling out the loan details (interest rate, loan term, payment schedule). And remember, many a family relationship and golf partnership have been ruined when a business fails and loans can’t be repaid.
* Home equity loans and lines of credit. Another possible source of financing, the equity in your house can often be tapped either through a fixed rate loan or a variable rate line of credit. These sources of financing tend to have much lower interest rates than credit cards or personal loans. The disadvantage, of course, is that your house is on the line. Fail to make the payments and you could face foreclosure.
* Banks and credit unions. Financial institutions are often reluctant to lend money to businesses without a proven track record, especially in today’s credit-challenged market. But that doesn’t mean you shouldn’t try. To increase your likelihood of success, take time to lay out a detailed business plan (a good idea whether or not you ever visit a bank), and be able to justify your business needs in writing.
Other sources of start-up financing include retirement plans, grants, even credit cards. Remember to think through the amount needed and have a realistic plan for repayment.
