Where Do People Get Their Money to Start Their Business
Getting access to the capital you need to start a business can be a very different story from one individual to the next. There are several ways that securing the funding you need to start a small business can be accomplished, and taking the time to consider all the options that are available to you could be the difference between watching your dreams materialize or pass you by.
Traditional Bank Loans for Businesses
Using a traditional small business loan to fund the opening of a business is typically done through a bank or other private lender. This is generally the most common type of financing used when starting a small to mid-sized business. With this type of traditional financing, you will most likely find the lowest interest rates for your loan, but this option is primarily reserved for those who have very good to excellent credit scores. If you are flagged as high-risk due to your past credit history, your loan application will almost invariably be denied, regardless of how sound your business plan and proposal are.
Another option is a bank-rate business loan. The large majority of bank-rate loans are secured with some form of business collateral by the borrower. This funding option is a commercial loan provided by traditional banks, credit unions and SBA lenders. Bank-rate lenders offer debt financing to both small and mid-sized businesses. With bank-rate financing available on a secured and unsecured level, it is a common choice for established businesses with a solid track record. While they are not used for starting a new business, they are commonly used to expand existing businesses or branch out into new business opportunities.
While self-financing with your personal resources is not the norm when starting a business, some individuals prefer to exclusively use their own money for start-up costs to avoid the monthly payments and interest rates that come with a traditional small business loan. This can also substantially reduce your monthly overhead and avoid the need to bring in a business partner.
If an individual does not have adequate resources in their saving, they may consider liquidating personal assets or using the cash advance option on a personal credit card. But in situations where none of these options are a possibility, borrowing against their home equity or using the funds in a retirement account, such as a 401K, may be potential sources of capital for self-financing their business.
Alternative Funding Sources
Individuals who do not have access to a traditional loan and do not have the resources to self-finance their business usually turn to an alternative funding source.
Asset-based lending allows a qualified business owner to secure a loan by using a business asset as collateral, such as their accounts receivable, inventory or business equipment. This means the lender that provides the financing will maintain an interest in the business assets until the loan is paid in full. This is done by involving a third party to guarantee monthly payments to the lender, which severely limits the borrower's control of their company cash flow.
A line of credit is a funding solution that helps a business pay for short-term expenses like purchasing equipment and inventory, or covering operating costs during a slow period. Lines of credit are similar to how credit cards are used, with interest charged on a revolving amount of debt. With this type of funding, the business owner is given access to a certain amount of credit, which can be drawn upon at their discretion.
A merchant cash advance is an alternative funding solution that is available to businesses that have been in business for a least a year with a verifiable history of sales. This type of funding is secured by future credit card transactions, making it a smart alternative to business loans and other traditional financing options, especially for small businesses that do not have the credit scores or collateral required to secure a traditional bank loan.