Options for new business finance

A new business is going to need financing to get started. And there are a surprising number of options for financing for a new business. This article discusses several of the financing options available to a new business owner.

Family and friends

One of the financing options available to a new business owner is borrowing money from their family members or close friends. Borrowing from family and friends may not be a good option for everyone, but for some people it might be their best option.

When a person has a family member or a friend who is willing to invest in the new business and help with the financing, the new business owner should handle the matter very professionally. It is best for the new business owner to act as if this loan is like any business loan they were to get from a bank. This means that they should provide the family member or friend with a business plan and a loan request. It is also helpful to have the projected earnings of the business for at least the first year. Drafting a contract for the loan is also a good idea. This way the family member or friend will feel more comfortable knowing there is a plan for them to get their money back.

Small Business Administration (SBA)

The Small Business Administration-or the SBA-might be a great option for a new business owner who needs help with their business finances. The SBA does not give loans to new businesses, but they do help them. The SBA will help lower the lender's risk when they give a loan to a new business by guaranteeing the loans. Since the lenders have a lower risk when lending money to a new business who is being helped by the SBA they are more likely to lend them money.

Borrowing your own money

Many people have a 401(k) plan that they have been contributing to. If a person does have one, it is possible that their plan will allow a loan. Usually when a person can borrow their own money from a 401(k) they can get up to 50 percent of the entire amount that they have in their account. The maximum amount a person is able to borrow is $50,000.

This type of loan can be a good idea since the approval process is very fast and the interest rates are pretty appealing. A person who takes out this type of loan also has a lot of options. They can use the money however they need to for their business. But of course this business financing option is not without its risks. The payments on this type of loan have to be made on the schedule that was set up and the loan has to be paid off on time or the person may have to pay taxes on the money they borrowed as well as a fee.

Banks

A more traditional way for a new business to get its financing is through a bank. It can be hard for a new business owner to prove to a bank or other type of traditional lender that their business has the potential to earn money. But when a new business owner has a sturdy business plan, great personal credit ratings, as well as good personal financial statements, they lender will be willing to take a chance on financing their business. It is also important for a person to have a good understanding of their business' projected cash flow. A bank likes to see that the new business owner knows what they are talking about when it comes to their business' finances.