Following with the previous blog about How much money do you need and how helpful it is when reducing unnecessary expenses. This week’s blog we continue to discuss about the business finance assessment options after developing a good, strong business concept. Experienced entrepreneurs and research show that “The best source of funds are the cash that you already have on hand”. Are you ready to spend your own money? How much money do you have? Well, it sounds real and serious doesn’t it, especially when you must use your own personal savings, or money borrowed from family and friends. It is true that if any angel investors see you, they surly want to see if you are willing to spend your own money too on your business. If you are not willing to risk your money to your business, why should they?
Between “needs and have” there is a little gap. Business needing more money to operate is just a normal fact. Prepare always to make sure your business does not run into trouble due to lack of cash. How to fill this gap? There are some options to think about:
- Collateral: is a security for a loan – something the lender can sell if they need to. Collateral is often real estate (including your home or business or other properties that you own), your cash in banks or credits unions, equipment and other items that will have a re-sale value. According to thebalance.com, “Any asset that your lender accepts as collateral (and which is allowed by law) can serve as collateral.” When you pledge collateral, the lender takes less risk, which means you are more likely to get a good rate.
It is very important to make the realistic and right decision about what you offer up as collateral to the bank. You must consider the risks of defaulting on a loan which could hurt your business and also your personal life. I personally prefer choosing other assets (but not my home) to use as collateral for a loan.
- Credit report: helps in securing an unsecured loan. Make sure to clean up all your bad credit, show a good payment history on all accounts. There are many online credit report agencies that you can get a free copy of your credit report once a year.
According to Entrepreneurial Finance of Steven Rogers on raising capitals, and some online research about funding sources:
- If you need less than $25,000:
- The best option is start with your own saving, family and or friends.
- Consider an equity loan. Equity is money or other assets that you own. In real estate, equity is the amount of the property that you own (the difference between the market value of the property and the mortgage you still own). Home equity loans are often easier to get and usually have low interest rates than commercial loans.
- Other option is credit cards: If you keep paying the bills in full each month. That may help you get a business loan but the interest rates may be higher.
- Seeking for non-bank lenders where provide business microloan (with an average of about $13,000). Keep in mind that this is to business that does not qualified for bank loans.
- 2. If you need more than $25,000:
- You would still need to put in some of your own money, often 30%+ of the total project expenses.
- You still consider a down payment or a home equity loan.
- Last option is keep seeking loan from banks and non-bank lenders.
- It does not hurt to search for business grants but research shows most start-up businesses do not qualified for grants, plus the grant process is extremely competitive.
It is important to understand and identify what source of financing is right for your business and whether you will be able to repay them. Only borrow what your business needs. Pay the loan on time will help build good credit for next round and next stage of your business.
Rogers, Stevenson (2014). Entrepreneurial Finance, Third Edition: Finance and Business Strategies for the Serious Entrepreneur. McGraw-Hill Education.