How to Finance Your Small Business

Planning Tips on the Road to Becoming Your Own Boss

by cashadvance.com

When you were a small kid, the world seemed a much simpler place. Shielded from the complications of the adult world, even the task of setting up a business was such an easy thing. All you needed was a board with a smiley face, some packets of instant lemonade mix and some water, and you had your first business. But as you grow up, things get complicated. Your parents are not going to be shelling out their lifetime savings to finance your business. And with the increasing competition in the market, surviving the business world can be a difficult task.

According to the Consumer Reports, in the year 2005, the average cost of starting a business was estimated to be around $70,000. According to a 2004 survey, 79% of business ventures collapsed due to unavailability of sufficient funds. Thus, acquiring funds for business is probably the most important task at hand.

Basic Funding

Before setting up a business, you should be of the mindset that during the initial period, the primary source of funds for your business will be your personal savings. You should not go to banks directly at the start, as banks show interest only in cases which have had an operating history. Some ways to obtain funds for business are enumerated below:

• Your Assets: An initial step could be to sell any high-priced valuables you wouldn’t need. Another alternative could be to use your house for acquiring a home equity loan. But beware: If you are not able to pay back the home equity loan amount in time, the bank would acquire your house. You could also acquire money from your 401(k) (up to $50,000 according to the IRS) or IRA savings account.
• Investors: If your business needs finances, you could search for investors who are willing to invest in your business startup. But what one must realize is that the money these investors provide is not a loan. Instead it is an equity investment, which means that you would have to give away a part of the company share, giving away partial ownership of the company. The riskier the business proposition, the larger proportion of the company is asked for.
• Unsecured Loans: Credit cards, friends, relatives and social lending come under this criterion. Make sure that when you take money from relatives, you take the money as loan, and not as equity shares. Credit card loans are a great way for setting up a business, as the credit limit can go up to $50,000, but comes with a high interest rate. And the unnecessary hassle to fill forms each time is deleted. Apart from credit card loans, social lending is another very popular alternative, in which one individual asks other individuals for loans.
• Bank Business Loans: By far the simplest and most commonly used way of asking for loans, these loans feel just like a mortgage. There is a fixed mortgage interest rate, quarterly or monthly payments, and a maturity date. But bank loans are not ideal for new business startups as the bank will ask for collateral and other assets, which it could acquire in case you miss any payments.

To get a business loan, you need:

• Business and personal tax returns;
• Business and personal financial statements
• A solid business plan, with promising projections and budget

Make sure that when the bank asks you for these details, you are able to provide them with a clear picture and your financial standings in the past. Even if you are new to the field, an impressive presentation can take your business places.

In the end, whatever the option you choose to finance your business, make sure you are comfortable with it, because in the end you will have to pay back any money you borrow. Go for an option which could guarantee some breathing space in case you are a little late on the payments.