Financing a new business can be difficult. It takes a lot of capital to start with no guarantee of return. Most people take out loans to finance their business. Other possibilities include investors and grants for those businesses that qualify. Here are three ways to finance your new business.
Types of Loans
Loans can come from several places including banks, family and friends, credit cards and a 401(k). Banks will only provide loans if the person has some sort of collateral. That may mean that the person has to take out a mortgage on his or her home or put up already established business assets. Bank loans usually provide decent interest rates but have the disadvantage that if the business goes belly up, the bank keeps all of the assets used as collateral. It is hard to lose a business and a home at the same time.
It is generally a terrible idea to borrow money from family or friends. They may not charge any interest, but they will feel upset if the loan does not get repaid. This can make social gatherings awkward and tense. Even good relationships have a habit of turning bad when money is involved. If an entrepreneur does need to raise funds though, friends and family are usually the happiest to give. The financial term for this type of financing, when the entrepreneur raises his or her own funds, is “bootstrapping.”
Credit cards may offer easy credit, but it generally comes at a steep. Credit card loans should only be for the very short term and should be repaid immediately. While they are not as bad as loan sharks, credit card interest rates once assessed can feel like two broken bones. No one wants to give you an arm and a leg – literally or metaphorically.
With multiple avenues to finance your new business, these are three common methods to get your business up and running when you need to finance your new business.
You may get a loan from your 401(k) to finance a small business. The loan must be paid back in a timely fashion or you may pay a ten percent early withdrawal fee. That along with the risk of losing out on retirement keeps many people from using their 401(k) money for a new business, but it can be a good decision if the business does well. No money is lost and when the loan is repaid, it goes back into the retirement account.
Angel investors are wealthy people who finance businesses that do not meet the requirements of venture capitalists. Venture capitalists are looking for companies that are going to go public in the short term – about five years. Angel investors are willing to have an ownership stake in the company regardless of whether it goes public or not. In addition to providing financial capital, an angel investor may be willing to provide intellectual capital with the running of the business. A wealthy friend, family member or customer may also fall into this category.
The United States Small Business Association (USSBA) offers a database of grants available to small businesses nationwide. These grants are free money, often funded by the government, which requires the business owner to fill out and submit paperwork. Grants do not have to be paid back. While the USSBA does not offer any grants themselves, they can offer help with the applications and other small business needs. Many grants are aimed at minorities including women.
Running a small business is time-consuming, but with all of the financial funding that is available, finding the right source for you can be a time and money saver. Visiting the USSBA can be the first step to financial independence and fulfilling work. It is important to seek out all of the possibilities before giving up on a dream as too expensive or difficult.