Starting a home business is a great idea.  But even the best ideas behind a small business can run aground if there’s not enough financing.  Still the primary reason for a small business to fail is because it’s under-financed.  With the US economy at a downturn, getting funding for a small business is a tough task.  Using the credit card as a way to raise financing is tempting but should not be a first option.  There are other ways for a small business to get funding.

Raising funds or capital the traditional way, a local bank is the first recourse.  In acquiring a loan, it helps if a small business already has a good credit record.  The small business owner can apply for a loan using business assets as collateral.  For the home-based small business, he can apply for a personal loan against a bank account.  The account stays intact and earning interest at the same time it’s being used as collateral.

The small business owner might also want to consider borrowing against personal insurance.  The insurance company would have standard rates for this in the insurance contract.

If the funding is needed to acquire capital equipment, the small business might want to take a look at chattel mortgage for the equipment.  In most cases this is more advantageous than buying the equipment on credit.  In some instances there’s no cash out needed in acquiring the equipment.

If the funding is needed to acquire vehicles or real estate, it’s more advisable to lease the vehicle or land.  Of course, this requires a clear and thorough leasing agreement on payment schedule and other terms, including additional insurance coverage on the vehicle or property.

Asking for additional funding from friends and relatives is a win-win situation for both parties.  Your friends and relatives know you personally and would be in the best position to help someone close to them.

On the other hand, potentially, this is a very fast way to lose friends.  Try to entice the would-be lender with a some interest on the loan as well as a repayment schedule and an opt out clause.  An opt out clause allows the lender to remove the money at any time.  For the lender, they might be getting better terms with the loan than keeping the money in certificates of deposit.

Another source for funding would be business associations and small business agencies or non-profit organizations and Government Small Business Loans.  Increasingly, there are more small businesses which take advantage of peer-to-peer or P2P lending.  There are several websites which cater to this type of loan facility.

The small business owner might also consider asking financial assistance from acquaintances, associates. Local businessmen or retirees are a good pool of potential investors.  Presenting the financial plan is very important.  It’s like selling the concept of the company and why the funding for your small business is necessary.

To keep the prospective investor interested, explain why the business is important to the community.  Include a single page summary of the opportunity the financing is needed for.  Present a fair and objective valuation of the company, it’s financial history and current state and it’s worth.  Make the potential lender feel like a partner in the business success.

Small businesses by their nature will meet limits of its funding.  A startup’s first year expenses is twice the budget.  Finding additional funding sometimes seems like a continuous process for the small business owner taking the time away from actually running the business.  But it is a necessary process and there are avenues for relief both through the traditional bank loans and non-traditional funding methods.

Oh, and don’t forget about home business tax deductions to save on your expenditure to help with your cashflow.