If you’re co
nsidering opening a new business, odds are good that you are investigating financing options such as personal loans. Especially in small businesses, start-up costs are typically financed with the use of one or several funding sources. If you’re starting a business with no or little start-up costs involved, you still have to consider how you’re going to cover the operating costs of the business until the company becomes self-sufficient and eventually turns a profit. Consider all or some of the small business financing options available to you before you choose one.
Personal Savings & Credit Cards
Many small business owners first take a look at the amount of cash they have stockpiled away into their personal savings account. If you’re depending on the business for full-time income, you want to make sure that you have enough money in savings to not only cover the business expenses but also your personal expenses for six to12 months. When personal savings isn’t an option for seed money for the business and the start-up costs are small, many would-be business owners use personal credit cards to buy the equipment or supplies they need to get started, and pay off the credit card balance as the business starts generating money.
Personal Loans & Home Equity Lines of Credit
It can be difficult for a business just starting out to get a loan since it does not have a business credit history. For this reason, many new business owners apply for personal loans to obtain the money needed to start the business. Personal loans require the applicant to be personally liable for repaying the business loan. Since a personal loan is personally guaranteed by the borrower, personal loans are approved on your personal income, assets, and your ability to repay the loan. While personal loans do not require collateral, another option is a home equity loan, which is a loan secured by your home. Similar to personal loan, home equity loans are personally guaranteed but also based on the value of your home and how much equity you have built up in the home. One issue with a home equity loan is that if you default on the loan, you have the chance of losing your home in the process.
Small Business Loan
While the other options – personal loans, credit cards, home equity loans, and cash savings – are all personal forms of financing your business, you also have the option of applying for a small business loan. The Small Business Administration (SBA) helps small business owners obtain loans to start and grow a business. Applying for small business loans can require more work than applying for personal loans because you may have to put together a formal business plan to illustrate how the money will be used and how the business is projected to generate enough money to repay the loan.