Business Financing: Different Methods to Finance a Business

The Numbers Game

There are several different methods to finance a business.

The first thing you have to figure out is exactly how much capital you need to get started. Some businesses will require a very large amount of capital, while others may be able to get started with very little.

You want to work carefully on this number. If you ask for too little you may find yourself in a tough spot.

Next you need to take an honest look at your personal credit. Down the road you will be able to rely on the credit history you build in the name of the business, but for now lenders are going to want to know about your personal history in order to make a decision.

Your Options

If your personal credit is very good, you can apply for a traditional bank loan. Because the business is new, and therefore has no track record by which a bank can make a decision, you will need to have a strong business plan.

You are essentially going to have to sell the business idea to the bank. The lender is going to have to believe in the business as much as you do or else they will be hesitant to take a chance on giving you a loan.

You will also need to provide details about any collateral that you are will to offer as a surety for the loan. Be careful about offering up personal property, such as your home.

Remember, if your business fails and you can’t repay the loan you are going to lose the items listed as collateral. Even if you are confident about the business succeeding it is still not a good idea to risk losing your home. It is a huge risk, because NO business venture is a sure thing.

The Government

If the bank cannot approve you in the traditional manner, you may qualify for a Small Business Administration (SBA) loan. You would still apply to the bank but, if you qualified, the SBA would guarantee your loan.

The program works in much the same way that the FHA guarantees home loans. To qualify for backing by the SBA you must have good credit.

If your credit is not good, there are different methods to finance a business that might work for you. Here are some places to look for alternative business financing.

Personal Investors

You may have friends or family members that would be willing to finance your venture. Set up a contract with those willing to help you with your business financing.

Finance Companies

Another method to finance your business is through specific finance companies. Loans from finance companies work similarly as bank loans, but they typically have less rigid requirements and much higher interest rates.

Credit Cards

This should be on the short list of “methods of last resort” for financing a business.

If you only need a relatively small amount and could handle the payments even if the business didn’t work out, then it is something you could consider.

Savings

Again, this is not the best idea for funding a business. You have worked long and hard to build your savings. Do you really want to deplete it when there is a chance the business will not work out?

It is an option, but be careful about the amount of your saving you use on business financing. You should certainly never use all of your savings. That could destroy you financially should something unexpected happen.

How to finance a business is not rocket science. If you have a good credit and a solid business plan you will more than likely be able to secure the capital you need.

If your credit is shaky, you might have to put your plans on hold while you rebuild your personal credit history.