Working capital is the life-blood of any business, whether it is a one-man operation or an enterprise with hundreds of employees. If you are just beginning the adventure of operating a retail store, restaurant or other undertakings, you might need an infusion of cash that you can count on.
Friends & Family
The first place a fledgling entrepreneur often looks to for financial support is friends, family, and other personal contacts. These are the individuals who truly believe in you and the potential of what you have to offer. They may be willing to take a risk on you without all the official paperwork and without the promise of a big payoff.
However, these advantages come with a cost. Should problems arise with your business and you find yourself unable to repay the loan, more than your credit will be at stake. In many cases, conflicts over money have broken families and friendships apart. So be sure of yourself before putting your personal relationships at risk.
If you have a strong personal credit score, you might want to consider applying for business loans from a traditional bank or an alternative lender. We’ll go over a handful of loans that are popular for start ups and how you should go about getting them below:
Business Lines of Credit
A business line of credit is very similar to the personal credit cards you probably already have. The only difference is that the credit line is tied to your business. These methods can be an excellent vehicle to help you get your business up and running since they usually do not charge you any interest for the first 9 – 15 months.
No collateral is required for these loans; however, your credit score must be 700 or more. You will only begin to make payments after you have charged items to your line of credit. Once interest charges begin to apply, your rate could be anywhere from 7.9 to 19 percent, but you will only pay interest on the funds you are actually using.
For instance, if you take out a credit line of $50,000 and charge office equipment that costs only $10,000, you will only be required to pay interest on the $10,000.
Another type of business loan that is handy for start ups is equipment financing. With this arrangement, you can make use of the equipment while paying it off. At the same time, the lender sustains slightly more risk at a lower interest rate.
As with a business line of credit, you must have an excellent credit score of approximately 700 or more. When applying, you will need to produce a detailed credit report, a narrative describing how you intend to use the equipment and complete information about the vendor from whom you want to make the purchase. As the equipment depreciates over the next few years, you can use this as a tax benefit.
The term of the loan generally extends for the life of the equipment that you purchase. While interest rates can be high, equipment financing is a reliable way to get costly equipment you need to hit the ground running.
The most important requirement for getting small business loans such as these two types is an excellent personal credit score. In general, the maximum loan amount is $150,000 over a period lasting anywhere from six months to four years. Interest rates vary widely from 8.9 – 19.9% and most business owners can expect an answer within 2 weeks.
Another way to gain access to capital for your company is via a Small Business Administration (SBA) loan. Contrary to popular belief, the SBA does not directly hand out money; instead, this independent federal body provides partial guarantees that reduce a lender’s risk in providing the loan. SBA loans are reserved for companies with under $7 million in tangible net worth and under $2.5 million in net income.
Although there are several SBA options, the most popular for small businesses is the 7(a) program, which can help you get up to $750,000 from a local lender. With a 7(a) loan, you can obtain working capital and purchase assets necessary for the running of your business. All parties with a 20 percent or more stake in the company must personally guarantee the loan.
The LowDoc Program
One particular 7(a) loan is the Low-doc program, which is designed for entrepreneurs borrowing less than $150,000. Intended to reduce paperwork, this program’s application is only one page long. The SBA will respond to your Low-doc loan application within 36 hours.
Finally, a discussion of business financing would not be complete without at least a nod to non-traditional vehicles. Perhaps the most interesting of these is crowdfunding. With crowdfunding, an entrepreneur raises funds among peers with an online platform like Kickstarter or GoFundMe. You create a representation of your project, offer incentives for early investors, and collect small investments from many contributors. Many a successful start up owe their beginnings to crowdfunding platforms.
The site manages the fundraising process. Usually, those who contribute to the cause are given some type of reward or incentive. The advantage of this innovative loan method is that no single lender needs to bear a large burden of risk. At the same time, a business owner who may have been turned down by traditional lenders can still get the funds he or she needs to transform a dream into a reality.
As you can see, obtaining funds can be done in a variety of ways. As a budding entrepreneur, it is up to you to determine the path you wish to take in order to secure your financial future. Do you want to go the traditional route with a line of credit or equipment financing loan? Or perhaps one of the popular SBA loans might be your speed. Don’t forget about the innovative newcomers to the lending arena either; they may give you just the boost you need.
Whatever the source you choose, start up financing will carry your enterprise through those difficult beginnings.