If at all possible, you should start your business without any financing beyond what is available to you. Do this by starting slowly and in conjunction with current employment. Start your business by working nights and weekends while keeping your current job for as long as possible. This way, if the business doesn’t meet your expectations, you’re out of debt and still have a job!

However, depending on the nature of the business, external financing may be necessary. For example, expensive equipment or initial stocks may be required. When determining your financial needs, remember that almost everyone underestimates what is required, so be careful and plan accordingly. And of course, don’t forget to account for contingencies: illness, bad weather, equipment breakdown, etc. Anything that increases the timeline towards profit! It is best to calculate a year before you see a profit. Here are some items to consider when preparing your initial budget:

o Office equipment (Fax, computer)

o Production equipment (for manufacturing)

or Office supplies

o Legal and CPA fees

or insurance

o Business licenses or permits

o Lease Deposits

o Remodeling costs

o Utility deposits (this can be quite large!)

or Salaries

Shipment

o Advertising and promotion

Hey the big one… the contingency!

What you want to avoid is having to seek additional funding during your startup phase. It’s usually easier to get financing the first time!

There are two main forms of business financing.

1. DEBT FINANCING. This simply means that you get a loan from someone or somewhere and go into debt! You are required to return the money.

2. EQUITY FINANCING. This involves “selling” a portion of your company to an outside investor. You are under no obligation to return the funds. In general, this type of financing is provided by venture capital firms.

The fact is that 99.99% of all small businesses will use debt financing as most “equity lenders” (venture capital firms) are interested in lending large amounts of money, usually a million. dollars or more. This article will only consider sources for obtaining debt financing for your business.

SOURCES OF DEBT FINANCING

1. YOURSELF! (Savings) You are your best “lender” if you have the savings. This approach can be quick and easy.

CAUTION: Make sure you have adequate savings for both the business and other life contingencies.

2. FRIENDS and FAMILY. If they believe in you and your idea, friends and family are sometimes willing to finance you. Choose this route carefully, and be sure to execute a formal loan document that sets forth the terms of the loan (interest, payment terms).

CAUTION: Many friends have been lost and many relatives have been alienated due to the bankruptcy of a small business.

3. BANKS and CREDIT UNIONS. Many banks and credit unions (check with your own and your local chamber of commerce first for other possibilities) will lend you money to start a small business. This approach will require you to submit a formal plan to the bank showing justification for the amount you are borrowing.

4. THE SMALL BUSINESS ADMINISTRATION (SBA). Visit their website (http://www.sba.gov). Contrary to what many believe, the SBA generally does NOT lend money directly, but guarantees a loan (usually up to 90%). This can make it much easier to get a bank loan as the bank’s risk is greatly reduced. The exception is that the SBA provides direct loans to certain groups, including disabled and Vietnam-era veterans and people with disabilities. In general, the SBA will not offer any assistance until a commercial bank has turned you down for a loan.

Most SBA-guaranteed loans range from $25,000 to $750,000. However, there is a “microloan” program for amounts from a few hundred dollars up to $25,000.

5. FINANCING OF SELLERS. If your business is heavily dependent on certain providers, you may be able to obtain financing through the provider. After all, they want you to use their product and therefore have an interest in helping you succeed.

6. STATUS. Some states have small business financing authorities that issue tax-exempt development bonds that can be used to finance land, buildings, and equipment for manufacturing companies. Check with your local government office for details.

7. HOME EQUITY LOAN. Interest rates for this type of loan are generally quite low, and interest is fully deductible for the first $100,000 borrowed.

CAUTION: You are putting your home in danger!

8. LIFE INSURANCE. Some types of life insurance policies (whole and universal life) have cash value that can be borrowed at very low interest rates. You are not required to repay this money, but if you do not, your policy payment is reduced by the amount borrowed.

9. RETIREMENT PLANS. Some retirement plans (401K, for example) allow you to borrow against vested benefits. In general, up to 50% can be borrowed as long as it is less than $50,000.

CAUTION: If you quit your job, the loan must be repaid immediately. If you don’t, the amount borrowed is treated as an early distribution and is taxable.

10. SUBSIDIES. Many foundations provide funding in the form of grants. Check “The Foundation Directory” at your local library or visit their website at http://fdncenter.org to find out which foundations may be interested in your specific business idea. The Foundation Center can be reached at (212) 620-4230.

11. CREDIT CARDS. These must be used with care due to the excessively high interest rates usually charged.

BAIL. Remember that many of these loan ideas will require you to sign a personal guarantee. This means that regardless of what happens to your business, you are personally responsible for repaying the loan amount. Think carefully before signing.