When you find something you’re passionate about, you want to see it through. That’s why knowing how to finance a small business is important. If you want to carry out your business idea, you will need money.
Being strapped for cash and stressing about carrying out your business concept is the last thing you want. With debt financing vs. equity financing, you have a few small business funding options when starting out. Learn how to finance a small business with these six tips.
1. Bank Loans - The most popular idea for financing a new business is to apply for a loan from the bank. However, securing a bank loan is the most difficult method of financing a new business.
To get a small business loan from a bank, you will need to have business experience, a strong business plan, and show that you can pay back the loan.
To receive a loan from the bank, you will need personal and business credit history, all your financial statements, a small business plan, cash flow projections, and a personal guarantee. In some cases you may even need to secure a personal loan for business startup. Research some small business loan tips to learn more.
2. SBA loans - Loan programs backed by the Small Business Administration (SBA) are another example of a startup business loan. The bank still provides the loan, but the SBA guarantees part of the loan as long as you meet the SBA loan requirements. If your business fails, the SBA will pay part of the loan so the bank does not completely lose out on money. That makes the bank more apt to give you the loan.
One loan program from the SBA is the 7(a) Loan Program, which helps you start a new business or fund your existing business. The maximum 7(a) loan amount is $5 million.
Another loan program from the SBA is the microloan program, which lends up to $50,000. Microloans are for small businesses that are starting up or expanding.
To learn more about applying for SBA loans, check out the Small Business Administration.
3. Credit Cards - You can use a startup business credit card to help finance your small business if you need to make immediate payments. However, don’t depend on credit cards. Be sure that you can afford to pay it off.
Keeping your credit score in tip-top shape helps you get approved for a line of credit or loan. One way to improve your small business credit score is to pay bills on time and pay more than the minimum amount due. With a good enough credit score, you may even be able to get a small business credit card without a personal guarantee.
4. Offering Collateral - When you offer collateral, you pledge assets in exchange for a loan. For example, some businesses offer a percentage of future earnings in exchange for one lump sum upfront. You can also offer your home or car as collateral.
5. Angel Investors - An angel investor is someone who invests in small business startups. Often, angel investors are colleagues of friends or family. You can also ask fellow entrepreneurs, lawyers, or accountants for referrals.
Note that angel investors are not lenders. Money from an angel investor is an investment rather than a loan. As you begin to make a profit, you will need to give part of your earnings to the angel investor. Angel investors own part of your business as a result of their investment. They expect a high rate of return on their investments.
When you ask an angel investor for money, make sure to give them a clear exit strategy, like an Initial Public Offering (IPO) for your company. Exit strategies for small business let your angel investor get out of their situation as an investor. An exit strategy will show potential angel investors that they will profit regardless of if the business fails.
6. Family, Friends, And Yourself - You might consider turning to your family and friends for a loan to finance your new business. If a friend or family member offers you a loan, make sure you have a plan for how to pay them back.
Borrowing from family and friends can be difficult because they want to see you succeed, but they also don’t want to throw their hard-earned money away. Make sure that you treat their loan as any other kind of loan. Show them your business plan, consult a lawyer, and put agreement terms in writing. Also, don’t forget to set up a payment plan.
When it comes down to it, you are one of your best small business funding options. If you have the means to do it, bootstrapping your business is a great route to take until you can successfully secure loans.
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