Start-Up Financing: What You Need to Know
What to Do Before Seeking Funding Sources
Just as strong credit and financial responsibility help people secure loans to use for cars or houses, they also help those seeking sources of financing for their small businesses. Thus, it’s wise to show potential lenders exactly how their loan money will be allocated to the fullest degree possible. Additionally, most lenders will consider a company’s debt-to-equity ratio in determining whether to make a loan, which indicates how much of his or her own money a business owner has sunk into a new business compared to how much he or she borrowed from outside sources. Therefore, it’s wise to finance as much of a project as possible by oneself to improve the odds of securing new sources of start-up capital.
Securing a Small Business Loan
Small business loans are quite common, and for many they mean the difference between being able to take an idea all the way through to fruition or chalking it up to a pipe dream. Many people also immediately think of taking out a business loan long before they consider other funding options, and that’s where they sometimes get themselves in trouble. Taking out too many loans before being able to accurately gauge the success of a business is a risky move for all involved, so it’s wise to explore all options before applying for multiple loans. When business loans are needed, however, banks and credit unions are among the obvious options. The Small Business Association has local offices across the United States, and it, too, may be able to offer guidance as to who might lend start-up money to entrepreneurs, while another source of knowledge might be the local economic development office.
Most business loans have to be repaid monthly, but like home or car loans, they are often structured differently. Sometimes, a business ends up paying more interest and less of the principal balance of the loan for a prolonged period of time, and in other cases, the opposite is true. Additionally, some lenders will start taking monthly payments at a low rate and then raise that rate once the business is projected to start performing more successfully.
Other Potential Financing Sources
While loans are among some of the better known sources of start-up financing, they certainly aren’t the only available option. Small business grants can sometimes be acquired through community, government or nonprofit organizations, among other entities. While small business grants can be harder to obtain, they offer many benefits in comparison to loans. Among their biggest draws is the fact that they don’t have to be repaid, meaning interest isn’t paid.
Another logical way to obtain the capital necessary to start a business is to borrow from family and friends. The money could come in the form of an outright loan, or they could take ownership of a small part of the company in exchange for their financial assistance. Prospective business owners can also obtain funding through personal means, such as taking out a second mortgage or tapping into stocks or bonds.
Many people also choose to finance part of their businesses using credit cards. However, due to the fact that interest rates will undoubtedly apply, this method is generally better used as a last resort. Another, less common method of financing a new business involves the help of a venture capitalist. Essentially, these people or companies invest in new businesses that they believe will be particularly strong, so it pays to have a thorough business plan and projected sales figures for those seeking this kind of financial assistance. While there are other sources of start-up financing out there, these are some of the more widely used and trusted.
Obtaining the start-up financing necessary for starting a business can prove complex, but a prospective business owner’s chances of finding it improves considerably alongside his or her level of knowledge about the proposed business, its projections and exactly how start-up capital will be used.
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