Getting the right funding for your small business

When you are starting a small business you will most likely need some type of funding, but the problem soon becomes what kind of funding is right for you. Because your business does not have a credit history it might be rather difficult to get traditional funding for your small business. But the good news is that there are many methods for funding your small business you just need to choose which method is right for you. The type of funding that is right for your small business depends upon what kind of personal credit history you have, how much capital you have already invested, and how much money you are going to need to fund your business. But keep in mind whether or not you go with traditional or nontraditional funding you should prepare a cash flow forecast and a business plan, so that you can show your investors how you plan to make money and how you plan to pay back your debt.

Here are some different types of funding that is available for your small business.

Traditional:
This is probably the most commonly used method of obtaining funding for your small business. Traditional funding is usually supplied through a bank in the format of a loan either directly to the company or in the form of a personal loan to the business owner. If you are going to be opening a small business and wish to take out a business loan you are going to need to create a cash flow forecast and a business plan. You are also going to need to have a good personal credit score, this is especially important because your business will not have any type of credit history so you are going to have to secure the loan personally until you can obtain a credit history for your company.

Commercial mortgage loans:
When trying to purchase property for your business you can run into problems with banks wanting to lend you money for certain types of properties, which are known as special purpose properties. These kinds of properties can include funeral homes, churches, sheet metal shops, etc. Banks try to avoid giving loans to these types of purchases because they are not as safe as other loans. Another thing that banks might try to do is to attach a balloon and/or recall provision to commercial loans. This means that the bank can require you to pay back the loan early under certain conditions. These can both be avoided if you look for non-traditional lenders, who tend to be a bit more understanding when giving commercial loans.

Life insurance:
If you have a whole life policy in place you can borrow against this policy. If you have term life insurance this would not be feasible. If you are going to borrow against this policy you should only do so if you have had the policy for several years so that the policy has some cash value. Insurers are known to let policyholders borrow up to ninety percent of the policy's value. But be sure to keep up on your payment obligations so that the policy stays intact, otherwise you will have to pay everything back at once.

Second mortgages:
This is a drastic option because if your business does go under you can lose your house. But some people will take out a second mortgage on their home rather than a regular loan because the interest you pay on the second mortgage is tax deductible and the interest you pay on it is usually lower than a credit card or an unsecured loan. Second mortgages are best for people who want to borrow a lot of money all at once and get a fixed monthly payment.

These are only some of the methods that you can use to get the correct funding for your small business, just keep in mind that what type of funding you choose for your small business will vary due to what you need the funding for.