So, you've decided that it's time to start your own business - that you no longer wish to work for "the man" as they say. You have your product or idea, you have your goals and objectives outlined in the form of a working business plan, you've formed your company legally with the state you plan to operate in, you’ve obtained your Federal Tax ID number and now you’re all ready to roll. But wait, we have forgotten one all important step in the process. The most important step perhaps. How do you obtain the loan (startup capital) to get the business off the ground? This step is arguably the toughest task of all for any new startup business. Why? Let's explore.
It's first important to note that most lenders, including banks as a whole, view startup business loans similarly to unsecured personal loans - very risky. Tim Carroll, Vice President for Deluxe Corporation, a company that helps small businesses with marketing, estimates that generally 50 to 70 percent of new startup businesses fail within the first 18 months. Certainly an alarming rate, yet it sheds light on why lenders tend to shy away from making a loan of any size to a new business.
So where does one turn to obtain such capital to kick start their business into existence?
You may start by considering dipping into your own personal savings from what you previously earned in your former line of work. Other resources could be personal credit cards, a loan from a family member or friend, or perhaps a loan secured by your most valuable personal asset, your home. Truth is, in my experience as a business banker, the sources listed above may be your best initial line of attack when looking to secure capital for your new business.
Now, if by chance you are not having any luck with obtaining startup capital from any of the sources mentioned above, it then becomes time to look elsewhere. Start with your local bank, but you should know, as mentioned above, most banks are somewhat conservative in their lending decisions when it comes to startup businesses. If the bank does express interest in funding your startup request, it's often typical that they will ask you to pledge collateral acceptable to them to secure the loan.
You may also want to look into an SBA (Small Business Administration) loan. The qualifications for an SBA loan are specific, although their programs are varied. The SBA will typically facilitate the loan for you with a third party lender, such as an SBA preferred bank.
A third option to look into is an angel investor. Such investors are typically affluent individuals who provide capital for a business startup in exchange for partial ownership in your company. It should be noted that while an angel investor is helpful in obtaining the startup capital you require to get your business off the ground, the risk you need to consider is in giving up ownership in the company and oftentimes the say to do as you please when making future business decisions. Proper research and careful review of the angel investor you go into business with is strongly encouraged.
So there you have it, some resources, but not all, to consider when looking for working capital to start your new business. Keep this in mind, Mark Zuckerberg of Facebook had to start somewhere and according to Forbes.com, as of March 2013, he's worth a cool $13.3 billion dollars at the ripe age of 29. Maybe you can ask him to fund your new startup? I suggest you start with a simple friend request.
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