Startup Loans Primer

By • May 5th, 2011 • Category: Loans

Startup Loans Primer

For those starting a new business, having a few million dollars to pay for startup costs would be ideal. It would be ideal, yes. But it’s not reality.

Reality is that for most entrepreneurs, you must prove your concept before anyone will put up that kind of money. However, most businesses require some sort of initial capital for things like inventory, marketing, physical facilities, incorporation expenses, etc. When exploring your funding options, there are several factors to consider:

• Are your needs short- or long-term? How quickly will you be able to pay back the startup loan or provide a return on investment?

• Is the money for operating expenses or for capital expenditures that will become assets, such as equipment or real estate?

• Do you need the money in smaller increments over a period of time or do you need all the money now?

• Are you willing to assume all the risk if your company doesn’t succeed, or do you want someone to share the risk?

The answers to these questions will help you determine which funding option is the right move for you. There are a couple of options to consider. Debt financing is when you borrow the money and agree to pay it back in a particular time frame at a set interest rate. Equity financing is when you sell partial ownership of your company in exchange for cash. The investors are responsible for all or most of the risk.

There are many options available for startups. First of all, your best resource is still friends and family. However, credit cards are also a good tool to use and can help with cash flow management. If you use this option, you should keep one or two cards with no balance and then pay it off every month to give yourself a 10- to 60-day float with no interest.

Bank loans come in all shapes and sizes, from microloans to six-figure loans. These are easier to obtain when backed by a third-party guarantors or by assets. If you need equipment, vehicles or even computers, leasing is the way to go. Angel investors fill the gaps between friends and family and venture capitalists. When the bank says no, private lending represents a viable alternative.

There are many channels available to you to raise capital. All of the above approaches have numerous variations. Put together a solid business plan, talk to a financial adviser and just start asking. Eventually someone will say yes.

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