Originally Posted by John Dessauer on January 18th, 2016
Financing a new business can be the toughest obstacle most potential entrepreneurs face. Finding sufficient capital to open a business, even a low-cost Internet startup, can be quite a challenge.
Some lucky individuals have access to private funds, such a savings account or an inheritance. Some entrepreneurs obtain gifts or loans from relatives or friends. If you borrow money from a friend or family member treat this loan with respect, just like with any financial institution. It would be a good idea to draw up a contract stating the date and amount of each payment. Calculate how long it will take to fully repay the loan. Also, pay off the loan early if possible. Taking these steps will eliminate any friction or resentment that might arise in the future because of this loan.
If borrowing money from relatives isn’t possible, consider other options. Financial institutions offer several types of loans for small business startup costs.
Line-of-credit loans are intended to help out over a short span of time. This type of loan has the lowest interest rate because it is considered to be a low-risk loan. The entrepreneur can use this line of credit as needed and interest is only charged on the amount actually borrowed. When the loan is repaid the money can be borrowed repeatedly.
When a larger amount of money is borrowed and paid back with interest over a long period, this is called an installment loan. These regular payments are paid monthly, quarterly, every six months, or even annually. This is a good loan when a large amount of money is needed for startup.
Two other types of loans are the secured loan and the non-secured loan. The secured loan has collateral to secure the loan. This type of financing can have a significantly lower interest rate than a non-secured loan. An example of a secured loan is a second mortgage on real estate used to finance a new business.
Banks are not the only financial institutions that offer small business loans. Finance companies also offer loans for new business startups. With this type of loan, the entrepreneur will need to write a business plan and obtain other documents for the loan requirements.
Another source of startup financing is the Small Business Administration (SBA). Some banks even offer SBA loan programs to help the small business owner with the paperwork and other requirements. Another part of the SBA is the Office of Women’s Business Ownership program or the (OWBO). This organization specifically helps women entrepreneurs in all stages of setting up and running their new business.
Federal grants can also be obtained to start a new business. Grants are money that do not have to be repaid. The website www.grants.gov is a good place to start researching the grant programs offered by the federal government. Also, if your looking at financing your real estate deal, look at the Funding Sources tab on the backside of the site. We have vetted the top 50 lenders, including banks, private money, hard money, crowd funders, etc. (It’s just one more reason you should belong to one of our programs!)
One more way of obtaining money for a new business startup costs is through investors. Investors essentially buy part of the business and become a part owner. Some investors are called a ‘silent partner’ of the business because they do not take an active role in the running of the business.
“Remember, wealth has nothing to do with money, success has everything to do with failure, and life is as simple as you make it!” – John Dessauer