Many people have creative ideas that could become a lucrative small business but many often feel they need a lot of money to begin. They lack personal funds, feel they don’t qualify for a loan or are just not sure about what sources are available. Because most small businesses require start-up costs, there are a variety of options to review that can help you obtain funding to get your business off the ground.
There are a few things to keep in mind that may determine which financial sources may be more beneficial to your needs. Determine if your needs are long-term or short-term. Know how long it will take to repay the loan. Will the money be used overtime in months or just as needed? If your business doesn’t succeed, are you assuming the risks on your own or sharing with someone else?
There are two types of financing you should review to better understand your financial needs; debt financing and equity financing. Debt financing is when you agree to pay the amount borrowed at a set interest rate. This is paid whether or not the business succeeds. Equity financing allows the business owner to sell a portion of the business to the investor for cash. If the business succeeds, it benefits the investor but they lose money if the business fails.
Family and friends may be a source of business capital with many small businesses owed by families. In most cases they won’t be concerned about your credit but with proper documentation and good record keeping, they could be a good support base. Credit cards may be used as long as it’s not a form of long-term financing. Managing credit cards well can benefit the business.
Bank loans are available in different amounts with microloans being a common form of small business financing. Some loans may be backed with collateral or value asset. Banks may approve you for a line of credit that applies credit to the loan amount after the money has been used. If you need large equipment, leasing is a good option. Financial advisors can also help you review options and important details.
If a bank denies your loan, a private investor may be another option to explore, especially if your business is in conjunction with a specific industry. Private investors with similar interests are likely more willing to take a risk. The Small Business Administration (SBA) provides additional resources on how to obtain funding for a small business.
Esther is a consumer finance blogger. She writes regularly about loans, mortgages and savings accounts.