We are on question eight of our list of questions you should ask and answer before starting a business! This week we are dealing with how to finance your start up. The traditional way is with a bank loan. You will need a business plan to apply for a bank loan and you need to know what your personal credit score is. Since the business is new, the bank will be concerned about your personal resources as a backup for paying back the business loans. Do some research and pick a bank which can tap into SBA guarantees as they can take on riskier loans.
Another source of funding is friends and family. It can be difficult to ask for their help, but using crowdfunding sites can make it easier.
You can also use peer-to-peer funding by using sites such as Prosper.com or LendingClub.com. Look into local non-profit group such as Community Development Corps. They often will provide loans up to $150K with very reasonable rates and terms. The SBA also oversees micro-lending programs which are also run by local non-profits. Micro loans can be used for working capital which is very helpful for many start ups.
If you are willing to give up part of your ownership, you can consider equity investors. Sites like Grow Venture Community, Microventures and Angel List can connect your with interested investors.
For certain types of businesses, look into factoring in which you sell your accounts receivable to a business in return for cash upfront. This is helpful if you must offer extended terms to your customers. A similar device is Purchase Order or Merchant Cash Advance financing in which you sell your future sales revenue (PO) for cash upfront. Both factoring and PO financing concern themselves with the credit history/rating of your customers rather than your business.
Finally, many small business owners rely on credit cards to fund their start ups. Be very careful with this method as you can quickly move into sky high interest rates which usually guarantee failure. Also be cautious with self-funding. If you use up all your personal resources, banks are unlikely to fill in the gap should you need additional capital. They prefer to lend the initial funds and have you fill in the gap with your own money.
That is just a brief primer on how to fund a new business. Let us know if you have had any positive experiences with any of these methods.