The dream of being a business owner is familiar to many working Americans. A great idea, a prime location and a superior work ethic are commonly recognized prerequisites for start-up success. The life blood of any business, however, is cash, and it is well known that a great number of early phase business failures are simply due to under capitalization. A start-up must have time to develop before it is required to throw off significant amounts of cash and proper financing will help a new venture grow beyond the start-up phase. There are a myriad of small business financing models available, and each new business will have intrinsically different needs, but four major financing methods are extremely popular.
The most traditional method of start-up financing begins at the bank. An excellent idea coupled with a well-written and thoroughly researched business plan can help an entrepreneur gain an audience with a bank loan officer. Many veteran entrepreneurs believe, however, that banks will only lend money to those who can prove they don’t need it. Since the economic meltdown of 2008, bank financing standards have become very stringent. Even those with excellent credit scores can be denied conventional financing. If approvals are possible, lots of quality collateral may be demanded. While interest rates for bank loans may be the most reasonable, the approval process can be arduous, and many potential small business owners look elsewhere for capital.
Small business financing by credit card was previously a frowned upon technique relegated to those outsiders who seemed willing to carelessly live dangerously like Las Vegas gamblers. Thoughts have changed, and more recently, small business credit card financing has become an accepted way to obtain cash. While credit card interest rates may be higher than bank rates, no collateral, business plans, cash flow projections or meetings with loan officers are necessary to procure this kind of financing. Of course, an excellent credit score is required to get the lowest rates and the highest credit limits.
Second Mortgages and Home Equity Lines of Credit
Although the recent mortgage disaster has severely limited this previously preferred financing method, home equity lines and second mortgages still can be obtained. Greater home equity percentages are required and high credit scores over the 750 mark are desired by lenders. Those who are able to qualify will find very attractive rates and longer repayment terms, and these two important facts prompt many small business owners to carefully apply for loans while they fully document all lender requests as they attempt to obtain home equity financing for their start up.
If all else fails, many entrepreneurs turn to family and friends for loans. Although very few individuals will easily part with their hard earned funds, family and acquaintances can many times be convinced to help finance a start-up business. Some may ask to be given some kind of equity in the new venture, while others may even request permanent product discounts. Loan terms and interest rates can be more freely negotiated in this type of loan situation, but all parties should be made aware of the risks involved. Remember, small businesses have a high failure rate and no one wants to tarnish the solid relationship they have nurtured with family and friends.
Thousands of Americans become small business owners every year. The independence and opportunities for unlimited income many times balance the longer hours and greater responsibility that come with being a business owner. Proper financing is one of the most important elements in any business plan and before leases are signed, employees are hired, and product is manufactured, adequate financing must be in place. This important step will help ensure success.