When financing a new business, it pays to be creative. Traditional lending sources, such as banks, can be an option for those with good credit and collateral. For other entrepreneurs, alternative funding sources are also available
Personal Savings
One of the most-readily used resources for funding a new business is often a personal savings account. This option gives you the most flexibility with the least amount of hassle. The money is yours, free and clear, with no interest or penalties for withdrawal. When tapping into personal savings, it's still advisable to leave some in the bank to cover your personal bills and living expenses while the business is building. A general rule of thumb is to maintain the equivalent of three to six months of salary, in addition to what you take out to invest in the business.401(K)
Another popular funding option is taking money out of a 401(K) or another retirement fund account. Similar to your personal savings, the money is yours and there is usually minimal paperwork required to withdraw the funds. On the downside, removing funds from a 401(K) and similar accounts, often carry penalties for early withdrawal. It's not uncommon to lose a portion of the money as part of the withdrawal penalty, in addition to paying taxes on the amount used. There are some exceptions (based on age and intended use of the money) that can lighten the tax burden, but it's best to discuss these options with a professional tax advisor before taking the money out of your account.Credit Cards
Credit cards are considered one of the quickest and easiest means of borrowing money. In most intances, entrepreneurs use their personal credit cards. Later, business accounts can be opened to cover ongoing financing challenges. While credit cards are an easy solution, they do come with risks, as well. Varying interest rates and high credit limits can cause your debt to mount, rapidly. Even a credit card that starts at a low, introductory rate can quickly rise, especially if you are late on a single payment. If you should continue to build credit card debt, and begin to falter on payments, it can negatively impact your personal credit rating, making it more difficult to secure other funding options in the future.Home Equity Loan
Especially for home-based business owners, taking out a home equity loan seems like a logical choice when searching for money to invest in a business. Regardless of whether or not you run that business from a home office, an equity loan has both pros and cons. Using the equity from your home is typically a safe bet in a stable housing market. If the equity is available, you can often get a competitive interest rate. However, if you have to use, or choose to use a loan type with a floating interest rate and a large, balloon payment, the risk increases significantly. Should a strong housing market suddenly shift and interest rates soar, you may be unable to pay rising mortgage payments. In which case, you could risk losing your home.Bank Loans and Credit Lines
If you have a solid credit rating and acceptable collateral, a traditional lending source, such as a bank can be a possibility. Business loans, personal loans, or a business line of credit are the most common routes for borrowing money from a bank. One positive note on bank loans is that it gives you an opportunity to establish a good relationship with a creditor. Having a relationship with a banker is increasingly important as your business grows. The downside of a bank loan, in addition to needing a solid credit history and collateral to secure a loan, is that you must keep up with scheduled payments. Because small businesses are typically considered high lending risks, the bank will follow your progress (or lack thereof) closely.SBA
The Small Business Administration (SBA) and other government-backed loans are viable options for businesses of all sizes. While you still have to go through a bank to secure the loan, the SBA guarantees that loan to the lender. The SBA will be more lenient in the type or amount of collateral it requires, and can sometimes ensure a more competitive interest rate with friendlier payment terms. Although the SBA is used to secure very large loan amounts, it also has a micro-loan program for smaller businesses or the self-employed who need less than $25,000 in working capital. The SBA also has several support centers established to help you complete applications, develop business plans and go through the other parts of the qualifying process.Friends and Family
Last, but by no means least on the list of lending options is the friends and family network. Borrowing start-up capital from people you know is one of the most common lending occurances for small business owners. When borrowing from family and friends, it's advisable to draw up a loan agreement that clearly specifies the amount loaned, whether or not interest is being charged, and details the plan for repayment. While it's easy to cut off a relationship with a bank, the reprucussions of doing so with family are much more far reaching and permanent.
