Financing Options For A Small Business
Before deciding on financing, you need to ask yourself:
- What business structure will I have?
- Am I willing to take all the risk or do I share this with a partner?
- How much start-up funding will I need?
- Will it be short-term or long-term?
- Do I need it all now or over a few months?
- Can I repay the money if my business fails? What assets do I have that I am willing to use as collateral?
- How long will it take to get profitable?
- How soon will I be able to repay the loan or provide a return on their investment?
In order to answer those questions, you will need a good solid business plan that shows the potential of your business to lenders.
You can finance your business either by borrowing money (debt) or by selling part of your business potential in exchange for a cash investment (and sharing the risk as well) (equity funding).
Ways To Finance Your Legitimate Home Business:
- Invest your own money – either fully or partially fund your start-up business.
- Borrow money from family and/or friends – make sure you have a written agreement in place with regard to terms of repayment.
- Using venture capital, but you will have to forfeit a share in your business in return i.e. you will have a business partner who will expect a healthy return on his/her investment.
- Business angels – these low profile investors are usually wealthy individuals with a lot of experience and knowledge who are willing to invest in start-ups (usually < $100,000) in return for having a say in how you manage your business.
- In looking for an angel, do your research to find the best fit for your business; look for one that has the knowledge, experience and networks that will benefit you the most.
- For more information on angel funding, visit the Angel Resource Institute
- Grants – these are not easy to get and they often require you to invest a similar amount.
- At Grants.gov you can look for and apply for federal grants.
- Credit for small business, such as credit cards should be used for short term cash flow only and managed carefully or it could become a very expensive method of borrowing money.
- A home based business loan varies from a fixed micro-loan to a large one, which will require some sort of guarantee or collateral. Alternatively, a line of credit will enable you to only borrow when you need the amount and you will only start paying interest then.
How do I get a home business loan?
If possible, apply to at least 3 different financial lenders so that you can compare what they have to offer.
To ensure you get the best loan agreement, ask the following questions:
- Is it a secured loan (collateral required) or unsecured loan (no collateral required)?
- What are the terms and conditions of the loan?
- How long do you have to pay back the loan? (term of the loan)
- If you want to repay the loan earlier, is there a prepayment penalty?
- What is your monthly repayment amount?
- What is the interest rate?
- Is it a fixed or floating interest rate?
The U.S. Small Business Administration has a loans and grants search tool that may help you find suitable government financing programs.
The Small Business Investor Alliance is another helpful resource for financing small business owners.