Start-Up Funding

When considering sources of funding, one of the first options that come to mind is to get a loan from the bank. This can work well, but there are several hurdles to overcome before your business will be approved for a loan. Commercial lenders are typically leery of loaning money to small business start-ups, because there is such a high chance of failure.

When approaching a commercial lender for funding, you will need a well developed business plan that shows when your business will be profitable. Also, it may help to have some sales under your belt before approaching the lender, as commercial lenders are looking for success. If you are given a loan from a bank, you may have to use some collateral of your own to get approved. If you put up your house, for example, to back the loan, the bank may be more willing to accept you because they have a way to get their money back if you should fail in your small business start-up. Of course, you then risk losing your collateral if you should not be able to pay back the loan.

Finally, your personal credit history needs to be clean when applying for start-up funding with a traditional bank. Since the bank has no business credit history to critique, your personal credit is the only thing that the bank can consider when deciding whether or not you are a good risk. If your credit rating is less than desirable, clean it up before applying for a traditional loan.

Depending on how much you need, you may be able to use some of your own money for your small business start-up funding. Consider, for example, your retirement savings. If your business is a sure endeavor, you can open up your 401(k) or IRA early and use some of that money to start your business. However, remember that when you do this, you will be sacrificing your own financial security should your business fail.

Another option is to get a personal loan, not a business loan, to help you with your start up expenses. A home equity loan, for instance, is something you can write off on your taxes. This will only work for small businesses, however, because the large amounts needed for a larger start-up will not be available in personal loans. If you only need a few thousand to get your feet off the ground, you may be able to get a personal loan to cover this.

A third option you have for business start-up funding is to use your friends and family members. This does, of course, require that you have friends or family members who have some money to invest. If you do, however, you could offer them a decent return on investment if they are willing to loan you money.

If you do ask friends and family members to loan you the money for your start-up expenses, be sure to handle the transaction professionally. Treat your friend as if he was a banker, because that is how he is acting towards you and your business. Create a written contract that outlines how and when you will repay the loan. Be sure to set up a payment plan that is acceptable for both you and your lender.

Keep in mind that failing to repay a loan that you are given from a friend or family member could cause you to damage your relationship with that person. Be sure that the individual knows exactly what your business entails and what the risks are. Have a back up plan that you can use if your business does not succeed as you expect it to so that you can still repay your loved one.

Yet another option you have is to use your credit cards to fund your business. Credit cards are easy to use, and many small business owners have enough credit offered to them that they can finance all of their beginning expenses. Special offers such as low or 0% interest rates make this an affordable option for those who are successful in their businesses quickly. For these reasons, credit cards are one of the primary sources of small business start-up funding.

Using a credit card solely for business expenses helps you keep your business and personal finances separate. If you have a charge on your business card, you know that the charge was for a business expense, not a personal one. Also, using a separate card does protect your personal finances somewhat. However, if the card is in your name, you are still personally responsible for repaying any debts that you accrue on that card, so keep that in mind while spending.

While credit cards can work well to fund the beginnings of a business, there are some things to keep in mind. First, those low interest rates will go up, which means that your affordable option will become much less affordable over time. The key to using credit cards effectively to start a business is being able to pay them off before the low introductory rates are over. Also, you are always responsible for the debt, no matter what happens in your business.

Another way to find the start-up funding that you need for your business is to enlist the help of a partner who has some capital to invest in the business. This partner can be either a working partner or a silent partner. Sometimes wealthy individuals will be willing to invest in your business in return for a small say in how the company is run and a decent return on investment. In other situations, you can find a working partner to help you run the company, and the two of you can pool your resources to create the start-up funding necessary at the outset. Using a partner works well if the two of you can work together to further the business. Choose someone that has the same goals and desires for the business as you do, and then carefully structure your business plan outlining the responsibilities you both will have.

If you have been looking for start-up funding long, then you likely have come across the term angel investors. Angel investors are people with a high net worth that are willing to invest in start-up businesses, including small businesses. These investors want to work with entrepreneurs when their businesses are young. The angel investor will provide the funding that the small business needs and will be repaid through equity in the company.

Angel investors not only contribute finances to a young business owner, but they also contribute their expertise. Most people who are interested in becoming angels have had some business experience in their past. They are willing to pass on their knowledge to the young business owner because he has become their monetary investment. The better he does in his business, the better their return on investment will be. Angel investors can help the young business owner build his professional network as well. The investor knows whom to contact for services and can pass this information on to the young business owner. For this reason, young business owners need to seek angels who are willing to offer advice.

Many angel investors belong to angel groups that give them the chance to explore different companies in which they can invest. These angel groups are a good place to go when seeking an angel investor. Most small business owners seek angels when they can no longer rely on friends and family or their own personal finances to fund their company. Also, professional advisors you have already networked with as you begin your company can point you in the direction of potential angel investors.

Venture capitalists are another source of start-up funding for a business. A venture capital firm is a company that invests for its customers. Venture capitalists have large sums of money, sometimes in the millions of dollars that they are looking to invest in new businesses.

Venture capital from these companies can be difficult to attain. Most venture capital firms are looking to invest in companies who are not quite new. While the company may still be in the start-up phase, it has been working long enough to be able to really project a potential success. These companies tend to have hard terms in their lending agreements, but those businesses that need a substantial amount of start-up funds may find that a venture capital firm is a good option. The trick is getting approved for funding.

To find venture capital money, you will need to network. Most venture capitalists are looking for young businesses in which to invest, but they tend to look through their professional network. Rather than approaching them, they will approach you. The more professional networking connections you make, the more likely it is that you will find the funding that you need for your business.

The Small Business Administration, or SBA, is another source of start-up funding that many small business owners overlook. When normal lending does not work for a small business, the SBA often steps in. The SBA does not fund loans, but rather works with investors to secure the loans. In other words, when the small business owner applies for a loan, the investor will have a guarantee from the SBA that some or all of the money will be repaid even if the business owner fails. SBA loans vary in size from as much as a couple million dollars to a few thousand dollars. However, only small business owners qualify for SBA loans. The SBA is very specific about the size of a business, and the size depends on the industry in which the business is operating. For example, businesses that are in the wholesale trade industry cannot have more than 100 employees to qualify for SBA loans. The SBA has three specific loan programs. Each one is designed for the needs of a specific group of small business owners.

To take advantage of the SBA loan programs, you will need to find a lender in your area that works with the SBA. This could be a private investor or a traditional lender. You will then need to create a loan proposal that carefully outlines your needs and your repayment plan. The lender then has the right to accept or deny your application. If accepted, part of the risk is carried by the guarantee of the SBA.

No matter which sources of start-up funding you choose to use for your business, you will need to carefully approach your lender. Remember, no matter who is lending you money, you need to make the impression that you will succeed in order to be approved. If you are not sure of yourself and professional when presenting your proposal, chances are you will not be approved for funding.

The first thing you need is a good business plan. In your plan, be sure to have projections as to when you expect to be profitable. However, a business plan is not enough when seeking funding for a small business. You also need to have the right personality to prove to your potential lender that you have what it takes to succeed.

Try to think like a lender, and look at your business with an open mind to see if you look like a good risk. Also, be sure to educate the lender some about the industry that your business is in. Remember, while you are passionate about your target market, your lender probably isn't. Your job is to show your lender what the industry is all about, where the need is, and how your business fits the need. With these ideas in mind, you will be more likely to secure the funding you need.