Where to Find Startup Money for Your Small Business

One of the top reasons that new businesses fail is due to under-capitalization in the beginning years. So, being able to raise money in the early stages of a business as well as during its expansion phases are critical components to a small business’s long term success.

When you are looking for initial capital to start your business, there are several sources to consider, including: credit cards and self funding, the Small Business Administration, peer to peer lending and banks or commercial lenders.

Self Funding
Depending on the nature of your business and the amount of capital required to start it, you may be able to finance it using your own personal resources. You could consider leveraging your personal savings, a line of credit or your personal credit cards to get started.

The advantages of leveraging your own funds are that there is no interest charges involved, it is a quick process and it does not require any paperwork to get started. On the negative side, you are spending money that could potentially be yielding higher returns in current investments, and if you choose to leverage credit cards, you may be paying a much higher interest rate than through other lending options.

Commercial Lending/Banks
Another option for new small business owners is to apply for a small business start up loan through a commercial lending institution or a bank. There are more stringent requirements for this type of start up loan than other loan types, but the terms are similar.

How much will it cost to get one of these loans? The interest rates for commercial loans and bank loans are dependent upon the applicant’s personal credit scores and the current rates, typically offering loan rates several points above the prime rate.

Commercial lenders and banks will often require a substantial down payment and collateral from you as a personal guarantee on the loan amount. These lenders are often looking at your personal ability to re-pay the loan at the time of underwriting.

Peer to Peer Lending
Peer to peer lending is a relatively new concept offering the ability for potential new business owners to borrow money from other individuals to start their ventures. The 2 main sites that currently offer the highest volume of loans are Prosper and Lending Club.

A potential new business owner will put together their presentation and information by creating an online user profile. Potential peer lenders will be able to review this information and can loan you from $25 – $25,000 if they feel like your investment request has an appropriate risk/reward balance.

On Prosper the interest rate charged to the Borrower will be determined once the loan is funded based on the lowest bids from the various lenders. On Lending Club, the interest rate is determined up front depending on your credit history and financial situation. This process can be quick, offering the ability to fund smaller loan amounts in under a month. It is also a more flexible strategy for applicants with little to no financial assets.

Small Business Administration (SBA Loans)
The Small Business Association or the SBA is one of the most common lending sources both for business start up and for business expansion, with several options available.

The most widely used SBA loan is the 7(a) which offers new business owners a possibility to apply for up to $2 million in start up capital. The SBA does require down payments, typically 20% of the total requested loan amount and they also require the business owner to personally guarantee the funds in the event of a possible default.

The interest rates on SBA loans are dependent upon personal credit scores and the interest rates at the time of application, but they are typically several points above the current prime rates. The SBA also offers other loan types including micro loans. A loan officer will be able to explain the options, the requirements and the process to you so that you can decide if this is the best financing option for starting your new business.

When you are ready to apply for a loan, you will need to put together a detailed business plan, a resume demonstrating your business experience and all of your personal financial records. Business experience, a well thought out business plan and a solid personal credit score with personal assets to back up the loan will make the process much smoother.