A great idea for a new business is only the first step toward success. Figuring out how to finance your business is likely to be among your biggest challenges.
There are many financing options for a new business. Some are easier to pursue and secure than others.
Startup financing options include:
Venture capital loans may be the most difficult to secure, primarily because venture capitalists have very specific investments strategies, will want to invest for a relatively short period of time—three to five years—and may want to be involved in your businesses’ operations and decision making. Venture capitalists also usually want to invest sums larger than a few million dollars.
Loans from commercial banks are also difficult to get for those without a proven track record in their field, according to Herbert Marks, a New York-based retired business financing executive.
“A bank isn’t likely to lend to a small business unless the owner agrees to a personal guarantee,” Marks told BusinessNewsDaily. Having experience in your industry could help improve your chances, but bank loans are still extremely difficult to get, he said.
The Small Business Administration does not loan money directly. It guarantees 75 percent of individual loans made by private lenders, up to $750,000. To qualify, a business must prove that it was unable to get a loan from a commercial lender. Business owners must personally guarantee SBA loans and must contribute 20 percent toward the company’s start up costs. And, just like a regular bank, they will carefully examine your business plan to determine whether your business is a good investment.
Home equity loans can be a reasonable and affordable option for financing your business . But Marks warns that using any form of personal financing that could cost you your financial stability long after a business has failed, should be considered carefully.
“If you’re taking out a home equity loan or using your credit cards, you’d better make sure you know what you’re doing,” Marks warned. “Ask yourself how much you really know about the business you’re getting into. If you want to start a business, go work in that field even if it’s for free for six months,” Marks advised. He suggested working in any and all parts of the business so you can really understand how it works and what kind of risk you’re taking financially.
Marks said that borrowing money from family and friends may be the safest and most effective way to finance a start-up. He also suggests that whatever business you choose, you start small and allow yourself to make mistakes on a smaller budget before borrowing large sums that you will have difficulty repaying.
If you do borrow money from people you know, be sure your repayment terms are in writing and have them looked over by an attorney , suggests Luanne Mayorga, Manager of the Illinois International Trade Center at the College of DuPage in Lisle, Ill.
“Even if you’re friends when you start out, you may not be when it’s all done,” Mayorga said. Having the terms of your loan in writing will help avoid any confusion and disagreement later.