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What are a Business Owner’s Options to get Financing

There are many ways to fund a small business initially. Some are obviously better than others, but it is good to always weigh your options to determine what works best for a given situation. Most lenders will have you fill out an application, possibly a credit report, and provide information on the business to apply for a loan.

The information may be a business plan, but certainly financial information – tax returns – business and personal, bank statements, personal financial, work history, etc. Also in many cases you may have to either provide collateral for a loan, or personally guarantee it.

The loan process itself can take 2 – 4 weeks on the review of the information and possibly another month to get the approval and receive the money. On an ongoing basis you will be expected to communicate with your lender providing updated financials and copies of yearly tax returns to monitor the business loan.

Here are some of the options you can try when looking for business financing:

Banks – Wells Fargo, Chase, etc.

This is a traditional business loan from a bank, with interest rate of 6 – 10%, and a loan timeline of 3 – 7 years. There may be short grace period in the first few months when you make interest-only payments. Then your monthly payment will be part interest, part principal for the rest of the loan term. If you have ever had a mortgage it is a similar setup.

SBA Loan – Small Business Administration

Loan is guaranteed or backed by a government organization, but the actual lending is usually still done by a traditional bank like a Wells Fargo. Lending limits could be from $100,000 to $2 million. There may be circumstances where the borrower is expected to be putting a % of their own money in their business to qualify. For example, if the SBA loan is $1 million, you may be expected to also be putting in 20% (or $200k0 of your own money. The terms will be similar to a bank loan.

For more information: https://www.sba.gov/starting-business/finance-your-business

Owner Funded – The owner of the business self-funds the start up and does not borrow money from anyone. Then there is a line item on the balance sheet that shows the initial capital invested.

Family / Private Lender – This is very straight forward loan from someone you know or are related too. There is still a loan document drawn up, with terms, and an interest rate (maybe even collateral), but the entire transaction is private.

Alternative Business Lenders – There are many different types of alternative lenders (like a Lending Club), but typically the interest rate will be higher (could range from 10-20%) and the payback features can be automatic. For example the payment for the loan may be made weekly directly from your bank account, like an auto-draft.

Credit Cards – This is not recommended as borrowing from credit cards can be quite expensive (interest rate of 20 – 30%) and your credit score can be damaged if there is an issue. Also the amount one can borrow may not be enough to fund a business start.

Grants – often the Government will have money to give to business (not a loan) to do research or start a business that serves a specific industry. You have to apply for grants and the paperwork and process can be quite lengthy.

Venture Capital / Angel Investor – Usually these types of lenders like to deal with new business that may a unique idea or product. The loan will have a window of 3 to 5 years, and often could have an equity ownership stake (20 – 50%) in the company and voting rights on a corporate board to maintain some level of control over the borrower.

There are numerous articles and websites available on the internet to get further information.

Here is just one example - http://smallbiztrends.com/2014/09/list-of-small-business-funding-resources.html

Good luck with your business.

 





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