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What Are The Most Common Ways To Fund A Small Business?

What Are The Most Common Ways To Fund A Small Business?

When it comes to acquiring the financial resources necessary to fund your small business some options are more attractive or attainable than others. There are a number of different factors which determine how much money is needed to fund your small business. Do you sell a product which requires inventory? Do you have a service business with a large amount of employees? How much advertising is necessary to attract sales? Are there excessive legal or regulatory costs required to operate? These and many more financial questions are thoroughly covered in a properly prepared business plan which will determine funding needs. When you know how much money you need you can then look at which available options are appropriate.

Borrow Against Your Home Equity

For home owners, especially those looking to fund a home-based small business, tapping home equity using a home equity line of credit or home equity loan is often the best option. Not only is the interest rate substantially lower than other types of small business financing but it is also tax-deductible as well. The only problem with using home equity is that if the business doesn't succeed and the loan needs to be repaid, a lien could be placed on the property resulting in foreclosure.

Creative Credit Card Financing

Credit cards are often seen as a financing option of last resort when looking at the most common ways to fund a small business. This is because while they are readily available to most consumers there are significant risks involved. Accumulating excess debt which generally carries a very high interest rate and possible collections mean more stress. Juggling credit cards by using balance transfer checks make this type of funding option complicated and often cost prohibitive. That's not to say it won't work for some small business owners, but you must have steady reliable cash flow in order to make monthly credit card payments where other types of funding may be more flexible.

Approach Friends & Family

A common source of small business funding is looking to friends and family to provide a loan when getting started. This may also be the only source of funding for many small business owners who don't own a home, have high credit limits and can't get approved for a small business loan at their bank or credit union. The risk of course is destroying personal relationships if you are unable to repay the money borrowed. Most individuals will want to assist people they care about and trust which is why this is a common source of funding. Just keep in mind what you risk losing if you are unable to repay the personal loans to which you've been extended.

Apply for Small Business Loans

For consumers with great credit and a long-term relationship with their financial institution, bank loans are another option for funding a small business. Due to strict lending requirements however many individuals may not qualify for a small business loan. Instead of relying on personal financial resources or someone you know, getting a business loan requires significant forethought and advanced planning. Financial projections, a business plan, personal income taxes and many other pieces of financial information are normally required when getting a business loan. The Small Business Administration both provides loans and gives guidance on applying for business loans to further small business development.

Operate on a Shoestring Budget

If all else fails and you are unable to secure financing for your small business, consider scaling back its scope and working on a shoestring budget. It is not always necessary to start a successful small business with $50,000 in start-up capital. Many small businesses which have grown into a multibillion-dollar corporations started in a garage or home office with little to no money. Consider focusing on your core business concept and limit advertising, inventory and other fixed and variable expenses until cash flows are sufficient to make it viable.

Image by: Carl Berger