Starting a business can be expensive. Depending on your industry, it is not unreasonable to spend the equivalent of your first several years’ profits just to cover equipment and other startup costs. Unless you are independently wealthy, this can be a daunting task. You need capital to get started, but getting a traditional business loan, SMB loan, or bank loan can be difficult without any business history.
So, what options do you have? Before we explore a few funding sources, let’s explore some basic steps you will need to take before you go out asking for money.
- Write a business plan. While a business plan is not an absolute necessity, it is a great exercise to help you better understand your new business and will come in very handy if you end up approaching a bank for a loan.
- Register your business name with your local government agency. This will make your business more legitimate.
- Register any patents or trademarks that will be integral to your success. This will protect your ideas from pirates or lending partners with bad intentions.
- Take inventory of your personal assets and your personal credit score. These are great bargaining chips, should you need them.
Now let’s explore possible sources for a business loan:
Family and Friends
You’ve heard the stories of Microsoft, Apple, and Amazon, all of which started in garages. Many businesses start out in a similar way. And can you guess where most of their funding comes from? Family and Friends are a great resource for new businesses, especially if your personal resources and personal credit put you at a disadvantage for traditional financing.
Who knows you better and believes in your ability to succeed better than those who know you best? Friends and Family are more likely to invest in your success in spite of past failures or poor financials. The downside to family and friends is that you still have to face them, even if you end up losing all of their money.
Private investors are a great place to turn to for new businesses that show great growth potential. Do you have an innovative new product, or will you be servicing a majorly underserved niche? If so, you should seek out private investors who get excited about opportunities such as this.
The downside is that private investors will likely want part ownership in your company and it may be hard or expensive to buy them out down the road. Financing your business with a private investor requires detailed research and projections to ensure that your future success will accommodate additional owners.
Crowdfunding has become extremely popular of the last 10 years. There are many websites where you can post your project or business idea and ask family, friends, and fans of your business to contribute. Many a startup has obtained the capital they need through crowdfunding. The key with crowdfunding is that you must have a compelling story to tell. You need your contributors to relate to you, to like you and to be rooting for your success.
The downside of crowdfunding is that most funding campaigns do not attract sufficient contributions to get the business off the ground. While you typically don’t have to pay the money back, it can end up being a waste of time for you and a waste of money for those who contributed.
Business Startup Loans
Business Startup Loans are ideal if your credit score is good and if you have assets or other income that can be used as collateral. A traditional bank loan will leave you with the greatest amount of control as well. As suggested above, come prepared with a business plan, a business registration from your local government agency, your current credit rating, a completed application, and any other supporting documents your bank requires.
If the bulk of your startup costs involve expensive equipment or machinery, you should consider a loan just for that equipment. The equipment itself is the collateral for the loan, and the interest rates are typically lower than a business loan.
Last but not least are credit cards. Many banks are eager and willing to issue credit cards to new businesses. It is not uncommon for a new business to secure a high limit card with a reasonable interest rate to be used for the purpose of getting the business started. However, as with any credit card situation, you have to be extremely cautious. The temptation is to run up a large balance that can become a burden to pay back later, so only use the card when absolutely necessary.
With these potential funding sources and preparation suggestions, you should be equipped to find a suitable loan to get your business started.
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