Making the decision to start your own business can be both exciting and daunting. There are many things to think about: picking a business name, choosing a business structure, getting the required licenses and permits, and creating a business plan. You will also need to figure out how to fund your business, since most people don't have the money to finance it themselves.
Others may have enough money, but don't want to have their life savings wrapped up in a business when there are no guarantees that it will succeed. This article provides a list and brief description of ten suggestions for how to fund your business.
- The U.S. Small Business Administration (SBA) has four basic loan programs:
a. 7(a) Loan Program: this is the SBA's most common program. The eligibility requirements vary depending on the specific aspects of the business.
b. Certified Development Company/504 Loan Program: this program has specific eligibility requirements and provides financing for major fixed assets such as real estate or equipment.
c. Disaster Loans: these low-interest loans can be used to replace or repair various items that have been destroyed or damaged in a disaster.
d. Microloan Program: The SBA's microloan program assists certain intermediary lenders in making loans to small businesses and certain not-for-profit childcare centers. This program provides loans of up to $50,000.
- United States Department of Agriculture (USDA) Rural Development: The Rural Development division provides loan guarantees for the purchase and expansion of land, buildings, equipment and working capital for cooperatives, nurseries, tourist and recreational facilities, hotels, motels, community projects, housing development sites and apartment buildings. These loan guarantees are provided only to businesses that save or create jobs in rural areas.
- State Financing Programs: Although state financing programs vary widely from state to state, all states offer financing programs. Funds originate from the federally-funded Small Cities Development Program and from state investment fund appropriations. Contact your state's department of trade and economic development to find out what's available.
- Local Financing Programs: Various governmental units provide forms of financing assistance to small businesses. The assistance may be in the form of the planning or business services unit of the county or municipality in which you operate (or intend to operate) your business.
- Commercial Banks and Savings and Loan Associations: If you can demonstrate a sound business plan and an operating history of two to three years, you may be able to obtain a loan from a commercial bank with favorable terms. Loans may take the form of lines of credit, inventory loans, accounts receivable financing, factoring (where the lender purchases receivables for a percentage of their face value), and conventional loans repaid over time. For newer businesses, a personal guarantee of the owner of the business will most likely be required. Savings and loan associations can also provide you with a business loan if you have appropriate collateral.
- Credit Unions: If you belong to a credit union, you may be able to borrow funds for your business. The procedure is generally simpler than borrowing funds from a commercial bank.
- Mortgage Companies: Some mortgage companies allow people to establish lines of credit on the equity they have in their homes, which can then be used to finance a business venture. Please be aware, however, that by doing this, you are putting your home at risk.
- Credit Card Companies: Although risky and costly, using credit cards to finance a business venture, particularly in the short-term, can be effective.
- Friends and Relatives: You may be able to obtain some funds from friends and relatives. However, it is important to pay back these loans on time to avoid making friends into enemies and relatives into estranged relatives.
- Life Insurance Policies: You can often borrow most of a life insurance policy's cash surrender value for your business. However, make sure you understand the terms of the insurance plan first to avoid voiding the policy or reducing the death benefits.
These are just some of the loan programs available for those looking to finance their business. Be sure to check the loan programs in your area before committing to a particular loan program on this list. And remember, while this list is helpful in providing basic information about various loan options, only you can know which type of loan will best fit your needs.
Getting Legal Help
If you have questions about how to fund your business or any other questions about starting a business, you may want to contact an experienced business and commercial law attorney in your area.
You can also visit FindLaw's Start-Up Financing section to find more information and resources related to this topic.