How to Finance a New Business
Determine your financial need., Use your personal savings., Ask friends and family., Get a bank loan., Obtain credit cards.
Step-by-Step Guide
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Step 1: Determine your financial need.
Figure out exactly how much money you need before you invest your own money or ask for others to fund your business.Research other businesses like yours.
What financial advice can you find out? What do experts say is the minimum about you need to start a business like yours in your area? Anticipate future needs to avoid a financial crisis.
For example, what happens if your business doesn't turn a profit for several months? Is your business seasonal and, if so, how will you make ends meet during the off-season? Make sure your financial need matches your business plan.
Your business plan cannot be more ambitious than your financial plan.
Remember that you will need to finance whatever you promise in your business plan.
Make a list of everything you need to start your business.
Do you need real estate? What about equipment or special licenses? Get accurate estimates of all costs so that you know how much you need from lenders or investors. -
Step 2: Use your personal savings.
Use all or part of your personal savings to fund your business.
Deciding how much of your savings to use depends on your level of comfort with risk.
The majority of small business owners use personal savings to start their businesses.Another option is to use part of your 401K.
Under the Rollovers as Business Startups option you can borrow money from your 401K without paying taxes on the funds or paying an early withdrawal penalty.Whether you use personal savings or your 401K weigh the risks against the benefits.
If your business fails, for example, you will be left with little to fall back on.
On the other hand, a successful business may more than pay back any initial investment. , Borrow startup money from family or friends.Treat this as any other business transaction and have a business plan and repayment plan in place.
Be sure to tell family and friends exactly what you need and why.
Saying you need money for a business is less convincing than saying you need a refrigerator for your new restaurant.
Let them know exactly how their money will be used.
You may want to offer a percentage of your business.
Family and friends may be more willing to invest if they will have a stake in the profits.
Remember that giving away too much will reduce your own profits and, potentially, your control.
Giving away 51% means that you do not have control of your own business.Defaulting on a loan from family or friends can ruin relationships so use this option wisely. , Banks lend money to people starting small businesses and those who want to expand existing businesses.Banks can loan large amounts of money not available from sources such as microloans.
Know your credit score.
Bank loans require strong credit.
Check your credit report before approaching a bank and fix any errors.Have sufficient collateral.Collateral may be needed to guarantee your loan.
If you do not have sufficient collateral within your business the bank may place a lien on your house.Create a realistic budget based on financial statements and projections for your business.Know why you need the money.
Banks are more likely to lend for reasonable expenses such as purchasing equipment but are less likely to lend for other reasons such as a cash flow problem.
Build a relationship with your bank before asking for a loan.
The more they know you and your business, the more likely they are to approve a loan.
For this reason it is better to use a bank where you are already a customer.Use a local bank or Credit Union and take advantage of loan programs guaranteed by the Small Business Association.
Banks may be more willing to lend if the loan is guaranteed by the government.
Local banks are more likely than larger, national banks to fund small businesses.Give the bank all documentation requested.
Loans are denied because of incomplete applications.
Make sure all documentation is complete and organized.
Ask how long it takes to get approved and have the funds disbursed to you.
This process can be lengthy (as much as 60 days).
You will need to plan your business start up with this timeline in mind., Exhaust other options first.
Credit cards can be a viable option but carry risks.If you have strong credit, you may qualify for lower interest rates.
Limit yourself to short term purchases if you have weak or mediocre credit.
Research different credit card options.
Look for low interest rates, balance transfers, reward programs and other benefits.
Business credit cards may come with higher credit limits and can aid in managing your business finances by keeping business expenses separate from personal expenses.Inability to pay the full balance each month can cause you to pay much more for purchases.
Credit cards are an easy way to increase debt and damage your credit score. -
Step 3: Ask friends and family.
-
Step 4: Get a bank loan.
-
Step 5: Obtain credit cards.
Detailed Guide
Figure out exactly how much money you need before you invest your own money or ask for others to fund your business.Research other businesses like yours.
What financial advice can you find out? What do experts say is the minimum about you need to start a business like yours in your area? Anticipate future needs to avoid a financial crisis.
For example, what happens if your business doesn't turn a profit for several months? Is your business seasonal and, if so, how will you make ends meet during the off-season? Make sure your financial need matches your business plan.
Your business plan cannot be more ambitious than your financial plan.
Remember that you will need to finance whatever you promise in your business plan.
Make a list of everything you need to start your business.
Do you need real estate? What about equipment or special licenses? Get accurate estimates of all costs so that you know how much you need from lenders or investors.
Use all or part of your personal savings to fund your business.
Deciding how much of your savings to use depends on your level of comfort with risk.
The majority of small business owners use personal savings to start their businesses.Another option is to use part of your 401K.
Under the Rollovers as Business Startups option you can borrow money from your 401K without paying taxes on the funds or paying an early withdrawal penalty.Whether you use personal savings or your 401K weigh the risks against the benefits.
If your business fails, for example, you will be left with little to fall back on.
On the other hand, a successful business may more than pay back any initial investment. , Borrow startup money from family or friends.Treat this as any other business transaction and have a business plan and repayment plan in place.
Be sure to tell family and friends exactly what you need and why.
Saying you need money for a business is less convincing than saying you need a refrigerator for your new restaurant.
Let them know exactly how their money will be used.
You may want to offer a percentage of your business.
Family and friends may be more willing to invest if they will have a stake in the profits.
Remember that giving away too much will reduce your own profits and, potentially, your control.
Giving away 51% means that you do not have control of your own business.Defaulting on a loan from family or friends can ruin relationships so use this option wisely. , Banks lend money to people starting small businesses and those who want to expand existing businesses.Banks can loan large amounts of money not available from sources such as microloans.
Know your credit score.
Bank loans require strong credit.
Check your credit report before approaching a bank and fix any errors.Have sufficient collateral.Collateral may be needed to guarantee your loan.
If you do not have sufficient collateral within your business the bank may place a lien on your house.Create a realistic budget based on financial statements and projections for your business.Know why you need the money.
Banks are more likely to lend for reasonable expenses such as purchasing equipment but are less likely to lend for other reasons such as a cash flow problem.
Build a relationship with your bank before asking for a loan.
The more they know you and your business, the more likely they are to approve a loan.
For this reason it is better to use a bank where you are already a customer.Use a local bank or Credit Union and take advantage of loan programs guaranteed by the Small Business Association.
Banks may be more willing to lend if the loan is guaranteed by the government.
Local banks are more likely than larger, national banks to fund small businesses.Give the bank all documentation requested.
Loans are denied because of incomplete applications.
Make sure all documentation is complete and organized.
Ask how long it takes to get approved and have the funds disbursed to you.
This process can be lengthy (as much as 60 days).
You will need to plan your business start up with this timeline in mind., Exhaust other options first.
Credit cards can be a viable option but carry risks.If you have strong credit, you may qualify for lower interest rates.
Limit yourself to short term purchases if you have weak or mediocre credit.
Research different credit card options.
Look for low interest rates, balance transfers, reward programs and other benefits.
Business credit cards may come with higher credit limits and can aid in managing your business finances by keeping business expenses separate from personal expenses.Inability to pay the full balance each month can cause you to pay much more for purchases.
Credit cards are an easy way to increase debt and damage your credit score.
About the Author
Betty Pierce
Committed to making cooking accessible and understandable for everyone.
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