How to Fund Your Small Business

It is never easy for a small business to obtain the necessary financing needed to make a successful go of the company. There are many options available and an owner has to look carefully at what will work best for his or her situation. Some options are going to work better for a certain credit profile or amount needed. The amount of risk has to be taken into account. What follows are different methods of financing and their pros and cons.

These are just about the same as a “traditional” loan except they are backed by the Small Business Association. The loan still has to go through a bank and they have the final say on whether to issue the loan or not. When applying for such a loan the borrower has to provide a robust business plan, solid collateral, demonstrate secure business assets, and an excellent credit rating. The borrower is also responsible for providing up to 30% of the loan. These loans are not for brand new businesses, but rather, those that have a solid history of successful operations behind them.

Your 401K is a potential good place to pull start-up capital from. In essence, you are borrowing from yourself. That means you are even paying interest back to yourself which makes it a cost-free loan. Obviously the downside is that you are risking your own money and you are limited to what you can borrow by how much you have in your 401K. Additionally, if you cannot pay back the loan, you are also subject to high fees and penalties.

A company can also acquire funding by offering equity in the company to potential investors. The investor receives a piece or equity in the company by giving cash. This allows a funder to have a say in the direction the company is heading and in the decision-making process. This type of financing is very low in risk and in terms of cost, but the business owner does give up some power in business operations. Another issue is that it takes a lot of time to research and pitch potential investors, with the possible result of many rejections before finding an investor, if at all!

A business line of credit is issued by a bank and resembles how a credit card works. It is a revolving line of credit and able to be used at any time. The risk is low on this type of financing since the bank’s money is being used and user of the credit line is not obligated to pay it back in cases of default. A strong credit profile is needed to obtain such a line of credit, though, because your personal credit is what guarantees it. This can be a good source for financing online start-ups since there is no hard collateral to these businesses that can be used to secure traditional loans.