How to Finance a Small Business: What Options You Have

The question of how to finance a small business is one that every entrepreneur asks when they are starting out.  One thing I have learned over the years is that what works for one type of business may not necessarily work for others. There is no “one size fits all” formula. Let’s take a look at the question of how to finance a small business and we’ll examine various answers that can apply to your business.

For the Start-Up

When it comes to a start-up company, the question of how to finance a small business is tricky to answer.  Since 95% of all businesses fail within the first five years, lenders are extremely cautious before extending credit.  In order to even consider your application, lenders typically require that your business is at least two years old.  You say to yourself:  “My business isn’t two years old, it’s a start-up!”  There lies the irony.

There are other financing options that you can take, but they tend to be expensive in terms of cost. For example, one way to finance your start-up is to use your personal credit cards.  As you probably already know, using credit cards can be an expensive proposition.  Another way is to take advantage of equipment leasing for copier, telecom, and machinery and equipment. It requires careful business analysis on your part to figure out if the economics of leasing work for your business model. In certain instances, the Small Business Administration may be an option for start-up loans and I will discuss that option below.

For the Existing Business

If your business is at least two years old, you have managed to make some profits, and you have a satisfactory credit score, then more financing options become available to you.  For example, the Small Business Administration (SBA) reviews start-up loan applications very carefully.  They are very choosy, so don’t get your hopes up.  If your business is at least two years old, you will have a better chance with a SBA loan.  Keep in mind that the SBA does not make loans.  It provides a guarantee to the lender that will make your loan. In order to ensure the best experience for yourself, make sure you find and deal with a “SBA preferred lender.”  These lenders make a large amount of SBA loans and therefore have priority consideration with the SBA.

Keep in mind that the SBA will require your business’s assets as collateral.  They will also require a lien on your home.  Plus, they will require your personal guarantee.  SBA loans are expensive in terms of interest rates and fees.  Make sure that you fully-understand the risk that you are taking.  If your business fails, the consequences to you will be enormous.

If your business is at least two years old and profitable, the next option to finance a small business is commercial bank loans.  Depending on your personal credit score and collateral quality, you might qualify for a loan from a commercial bank.  Typically, a commercial bank will require the same collateral and guarantee package that the SBA requires.  The difference here is that the interest rates and fees may be more competitive than what the SBA offers.  Remember that leasing is still an option for you and might carry more competitive interest rates if your business is at least two years old and profitable.

Getting Started

How to finance a small business is something that every entrepreneur struggles with; no matter what industry he or she is in, and no matter what size the operation might be. So know that you aren’t alone in trying to answer the question of how to finance a small business.  Stay patient and try not to get frustrated during the financing process. Take the tips that I’ve outlined above and compare them with whatever your situation might be.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

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