Before you can ask lenders or investors for capital, to get your enterprise of the ground and on the way to success, you will be personally investing in your small business. In fact, most of the money needed to start your business will come from deep within your own pockets. So, before you can seriously consider selling a product or service, you will have to sit down and consider your financial health and how much money you have to sink into your business.
Your Bank Account
In the beginning, about 80% of all entrepreneurs will delve into their personal savings and bank accounts, to start their small business.
So, you are definitely not alone! Maybe you have been saving for years, while working for someone else, with the notion of becoming your own boss some day. Maybe you have inherited some money and decide this is a golden opportunity to make a dream become a reality. Either way, if you really want to finance a small business, you are going to have faith that what you have to offer in products or services will sell and put your own money on the line.
Collateral
Even if you have been saving for years, and think you have enough money to keep a business going, until it starts showing a profit, you may be surprised. Paying employees, the location, equipment and supplies, or whatever you need quickly adds up. Your ready cash is already in the business and now you need the collateral to get a small business loan.
But, where are you going to get the kind of money? For many small busy owners, the answer lies in the roof over their heads. If you own your own home, and have significant equity, you might be able to acquire a home equity loan. However, especially with the economy weak in this area, the bank will need assurance that if you default on the loan that they will be able to get their investment back by selling your home.
So, you will have to get an appraisal on your home. In most cases, a lender will want you to at least have 50% equity in your home. Of course, you will now have to subtract the cost of the appraiser.
Unfortunately, there is definitely big risk in putting your home up as small business loan collateral. If your business should fail to withstand the pressures of hard economic times and the competition, you will not only lose your business, but your home as well. You will definitely need to weigh the risks against the benefits. Plus, if you are married, you and your spouse should be in total agreement that this is the way to finance your small business. More than one promising entrepreneur has lost everything, including family, when their business has fallen on hard times.
Credit
If you have excellent credit and can show yourself to be a good credit risk, you might be able to use the leverage to get a business loan. But, if your business is just starting out, this may be an impossible task, because you have no credit history on which to lean. But, if you have already been in business for a couple of years and need some capital to expand or invest in new equipment, you will definitely have a better chance of getting a loan. In short, the facts of your business will speak for you.
Loans
Many entrepreneurs depend on small business loans to keep their business growing. The loans may be short term, until purchase orders are paid, or projected income is realized. Conversely, it may be a long-term loan in order to expand the business or renovate to bring in more customers.
Generally, if you get a loan, it will come from one of two sources:
• Commercial Lenders
• Friends and Family
In either case, getting a loan has its own risks and benefits to consider. So, you will have to be very confident that the loan can be paid back as agreed, or it can do irreversible damage to you both personally and professionally.
For many, commercial lenders are the only way to get a small business loan. It is all about crunching the numbers, going through a business plan, and assessing the credit risk. It is all kept professional and straightforward.
However, if a commercial loan is not possible, you might need to turn to friends and family for small business financing. But, for the sake of your personal relationships, treat it as you would any other business transaction. Get the terms of the loan down on paper. Many a relationship has gone south when financing a small business has crossed the line between love and loan. So, whether the loan is commercial or personal, make sure the terms are written down.
Well, now you know at least four ways to use your own money to invest in small business. None are without a certain element of risk. So, it is extremely important to weigh the pros and cons, as well as consider alternative financing, before signing on the dotted line.