In Brief: (1) Prepare your new business for financial success by first considering self-funding. (2) If you’re unable to self-fund, consider the goals and scope of your business to determine your best option. (3) If you are seeking a personal loan for your business, make sure to first gather all of the necessary documents before your trip to the bank.
Imagine that you have a million-dollar business concept. The challenge is you only have $500 to fund your million-dollar business concept. Do you give up, or do you find a way to finance your business?
With funding options including small business administration (SBA) loans, business credit cards, crowdfunding, venture capitalists and more — you can still pursue your
First consider self-funding or borrowing from trusted sources
Stay bootstrapped and self-fund: To maintain 100% control over all the decisions and finances of your business, self-funding is your best option.
But while self-funding is admirable, use caution when borrowing against your own assets, such as a primary residence. This is a huge risk to take, as the U.S. Bureau of Labor
If practical, consider borrowing from family or friends: The next-best option is borrowing from trusted sources, such as friends and family. However, these resources need to understand that they could lose 100% of their investment. This could lead to strained personal relationships.
If you already have a successful business, consider debt financing: Leverage the success you’ve had so far in your business life and apply it to your next venture with business financing. The Hartford notes that this route of funding has several advantages, such as the following:
- You retain control over your business and all the decisions.
- You will have a tax advantage; the amount you pay in interest is tax deductible.
- You will be able to plan easier. You will know in advance how much principal and interest you will pay back each month.
“If you already have a profitable business that’s growing, debt financing (ex. small business loan) can be a good option while your profit growth rate exceeds the loan interest rate. You maintain complete control and give up no equity.”
Find other avenues best suited to fund your new business
Look for an angel investor: Maybe self-funding or getting a business loan are not viable options for you. There are entrepreneurs who have “been-there-done-that” in the business world who can help get your business off the ground while you still maintain the majority stake.
Determine how much equity you’re willing to give up: Different funding options may require you to give up equity to stakeholders, such as venture capitalists (VCs). Keep in mind that VCs are less interested in your business’s idea and more interested in its potential for rapid growth, profitability and expansion. Investors in this realm usually seek start-ups with a high probability of performing well in a particular industry.
“You will have to ask yourself if it makes more sense to have a large cash infusion and give up some equity in order to get to a point quicker — or if it is worth taking it a little bit slower and not giving up equity so that you potentially have a better payout in the long run.”
Gather the appropriate documents before applying for a business loan
If you are seeking an SBA loan, there are several documents you’ll want to prepare before scheduling your appointment at the bank.
American Express shares that the process of applying for an SBA loan will delve into almost every facet of your life, and the qualifications for a business loan depend more on growth in cash flow and less on revenue.
- Know your credit score. A business loan requirement is for both the company and the owner to have great credit scores. For companies, excellent scores are above 80 and for business owners, good personal credit scores are above 750.
- Gather documents to prove your annual revenue. Make sure you have accurate monthly financial statements from the past two years on hand. Don’t be surprised if a lender also asks for copies of your bank account transactions so they can confirm cash flows that are reflected on your financial statements.
- Have a solid business plan. Make sure to include projected financial statements and a plan for how you will pay the money back, as well as the resumes of key managers in your company and how they will make a difference.
- Be prepared with additional collateral. To offset their risk in case your business fails, a lender will want financial collateral. This can include the company’s accounts receivable, equipment, or other easy-to-sell assets.