Perhaps the most difficult part of starting your own business is the procurement of needed financial resources and inadequate financing is often the cause of business start-up failures. There are six commonly used sources of financing:
Personal Resources: This includes bank and savings accounts, credit card borrowings, a second mortgage on your home, the sale of investment assets, and the loan value of your life insurance. Use of your 401K is not recommended in most cases. You will be expected to provide 30% to 50% of the financing to start your business!
Family and Friends: This could include family or friends making a personal loan, an equity investment, or co-signing your note at a financial institution. Whatever the mode, you must treat their assistance on a business basis, with appropriate note agreements and other formal legal documents. Treat your family and friends at least as well as your bank!
Direct Bank Loans: If your business is a start-up, this is an unlikely source. Collateral alone is not sufficient to initiate a loan from a bank. A proven track record of three years of profitable operations is a common requirement for this source.
SBA Guaranteed Bank Loans: This is a more likely source but still requires some form of successful track record. If you have a prior business experience that was profitable, this could help. Seek professional help to complete the bank and SBA application requirements, including a SCORE Counselor.
Lease Financing: This is a good source for equipment acquisitions. A lease typically involves less detailed credit requirements but be sure of the rate, term and what occurs at the end of the lease.
Vendor Financing: This source is especially applicable to an existing company that is growing profitably. Vendors want new customers who are able to pay their bills and will reward them with special payment terms and even in some situations, inventory on a consignment basis. Cultivate your vendors and remember that low price is not necessarily the best choice.