Paying out of pocket for repairs and renovations is one of the more unfortunate aspects of home ownership. Large, costly renovations may occasionally be necessary in order to get your home ready for sale, while emergency repairs pose the risk of draining your bank account with little warning. If you own a home or are thinking of buying one, it is immensely helpful to learn how to finance home repairs before they arise. The guide below covers a few of your options for paying for home repairs.
Steps.
1. Refinance your mortgage to obtain cash for home repairs. A popular way to pay for home repairs and renovations is through a "cash-out refi," which is simply a way of swapping your existing mortgage for a new one and converting some of your home equity to cash in the process. Your current mortgage lender can help you understand your options for refinancing. Note that liquidating your equity in this way will generally cause your monthly payments or mortgage term to increase.
2. Obtain a home equity line of credit. A home equity line of credit functions like a credit card, with an open-ended term, a credit limit, and a minimum monthly payment based on your outstanding balance. This type credit makes sense for financing home repairs or remodeling projects because these projects tend to increase your home equity anyway.
3. Seek out a second mortgage. A second mortgage can be an unattractive option as it can tend to overburden you with debt, but for home repairs with an end in sight they are helpful. A second mortgage is a loan secured on your accumulated equity. The interest rate will be higher because your primary mortgage lender is given preference over your new lender in case of insolvency; for this reason, try to keep the size of your second mortgage as small as possible.
4. Determine if you qualify for a government loan. In the United States, the Federal Housing Administration runs a loan program called Title 1 for homeowners with very little equity. These loans are made by banks and backed by the federal government, and can be used to finance essential repairs such as structural and electrical problems.
5. Use a credit card for small, emergency repairs. While credit cards typically carry higher interest rates than loans secured on your home equity, they make sense for funding small home repairs. A credit card is available for use immediately and requires no paperwork, unlike other financing options.
6. Borrow from your 401(k). Many employers allow borrowing from your 401(k) to fund home repairs and renovations. This option is low-hassle because the money is already yours, so there is no paperwork or credit check. However, you are required to pay the borrowed money back into your 401(k) before leaving the company.
Tips.
If performing home repairs yourself, it is best not to skimp on materials. Durable, high-quality materials may cost more upfront, but will generally last much longer and prevent you from having to repair or replace materials later.
Warnings.
Avoid entering into financing arrangements directly with the contractor performing the work. These types of deals often carry high interest rates and hidden fees.
Paying out of pocket for repairs and renovations is one of the more unfortunate aspects of home ownership. Large, costly renovations may occasionally be necessary in order to get your home ready for sale, while emergency repairs pose the risk of draining your bank account with little warning. If you own a home or are thinking of buying one, it is immensely helpful to learn how to finance home repairs before they arise. The guide below covers a few of your options for paying for home repairs.
Steps.
1. Refinance your mortgage to obtain cash for home repairs. A popular way to pay for home repairs and renovations is through a "cash-out refi," which is simply a way of swapping your existing mortgage for a new one and converting some of your home equity to cash in the process. Your current mortgage lender can help you understand your options for refinancing. Note that liquidating your equity in this way will generally cause your monthly payments or mortgage term to increase.
2. Obtain a home equity line of credit. A home equity line of credit functions like a credit card, with an open-ended term, a credit limit, and a minimum monthly payment based on your outstanding balance. This type credit makes sense for financing home repairs or remodeling projects because these projects tend to increase your home equity anyway.
3. Seek out a second mortgage. A second mortgage can be an unattractive option as it can tend to overburden you with debt, but for home repairs with an end in sight they are helpful. A second mortgage is a loan secured on your accumulated equity. The interest rate will be higher because your primary mortgage lender is given preference over your new lender in case of insolvency; for this reason, try to keep the size of your second mortgage as small as possible.
4. Determine if you qualify for a government loan. In the United States, the Federal Housing Administration runs a loan program called Title 1 for homeowners with very little equity. These loans are made by banks and backed by the federal government, and can be used to finance essential repairs such as structural and electrical problems.
5. Use a credit card for small, emergency repairs. While credit cards typically carry higher interest rates than loans secured on your home equity, they make sense for funding small home repairs. A credit card is available for use immediately and requires no paperwork, unlike other financing options.
6. Borrow from your 401(k). Many employers allow borrowing from your 401(k) to fund home repairs and renovations. This option is low-hassle because the money is already yours, so there is no paperwork or credit check. However, you are required to pay the borrowed money back into your 401(k) before leaving the company.
Tips.
If performing home repairs yourself, it is best not to skimp on materials. Durable, high-quality materials may cost more upfront, but will generally last much longer and prevent you from having to repair or replace materials later.
Warnings.
Avoid entering into financing arrangements directly with the contractor performing the work. These types of deals often carry high interest rates and hidden fees.
A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.
Part 1 Arranging Financing with the Franchisor.
1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.
Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.
Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.
This information may be available online or in other documents provided with your franchise application, or you may need to request it.
2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.
McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.
3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.
The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.
Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.
Part 2 Securing Outside Financing.
1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.
Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.
These loans usually require you to have already established a relationship with a banker.
2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.
SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.
You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.
The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.
3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.
Two of the biggest online loan portals are Boefly and Franchise America Finance.
Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.
4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.
Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.
Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).
However, equity does not have to be repaid (unlike a loan).
You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.
Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.
Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.
If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.
Part 3 Using Your Own Assets.
1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.
Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.
2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.
You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.
You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.
Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.
3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.
If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.
Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.
So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.
Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.
Be warned, however, that if your new business fails, your retirement funds will be wiped out.
Part 4 Refinancing Your Franchise.
1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.
You can get a loan at a better interest rate.
You want to consolidate multiple loans into a single payment.
You want to change from and adjustable to fixed rate of interest, or vice versa.
You need more capital to update equipment, make improvements, or open an additional location.
2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.
Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.
Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.
3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.
There may be other penalties as well, based on the details of your old loan.
The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.
4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.
Strengths and weaknesses of your business.
Major milestones or accomplishments.
Expertise you have developed in running the franchise.
Goals for the next two to five years.
Two years of tax returns.
The payment schedule of your current loan.
5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.
Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.
You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.
Tips.
Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.
Warnings.
It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.
Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.
A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.
Part 1 Arranging Financing with the Franchisor.
1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.
Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.
Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.
This information may be available online or in other documents provided with your franchise application, or you may need to request it.
2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.
McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.
3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.
The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.
Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.
Part 2 Securing Outside Financing.
1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.
Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.
These loans usually require you to have already established a relationship with a banker.
2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.
SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.
You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.
The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.
3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.
Two of the biggest online loan portals are Boefly and Franchise America Finance.
Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.
4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.
Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.
Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).
However, equity does not have to be repaid (unlike a loan).
You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.
Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.
Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.
If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.
Part 3 Using Your Own Assets.
1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.
Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.
2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.
You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.
You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.
Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.
3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.
If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.
Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.
So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.
Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.
Be warned, however, that if your new business fails, your retirement funds will be wiped out.
Part 4 Refinancing Your Franchise.
1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.
You can get a loan at a better interest rate.
You want to consolidate multiple loans into a single payment.
You want to change from and adjustable to fixed rate of interest, or vice versa.
You need more capital to update equipment, make improvements, or open an additional location.
2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.
Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.
Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.
3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.
There may be other penalties as well, based on the details of your old loan.
The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.
4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.
Strengths and weaknesses of your business.
Major milestones or accomplishments.
Expertise you have developed in running the franchise.
Goals for the next two to five years.
Two years of tax returns.
The payment schedule of your current loan.
5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.
Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.
You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.
Tips.
Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.
Warnings.
It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.
Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.
Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.
Method 1 Taking Out a Loan.
1. Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.
Own or seek to own a small business as defined by the SBA. This information can be found on their website.
Plan to operate for profit.
Plan to operate within the United States or its possessions.
Have your own assets invested in the business.
Show a need for the loan.
Not owe the US government any money.
2. Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.
If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.
3. Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:
Equity in your own home.
Assets owned by the business, like accounts receivable and inventory.
A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.
Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.
4. Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.
Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.
You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.
5. Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:
Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.
Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.
Method 2 Financing the Purchase With Your Own Assets.
1. Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.
2. Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.
3. Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.
4. Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.
Method 3 Bringing On Investors or Partners.
1. Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.
In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.
2. Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.
3. Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.
Angel Investors can be located by visiting the Angel Capital Association's website.
4. Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.
Method 4 Getting Seller Financing.
1. Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.
Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.
Obtaining seller financing may give you more power in negotiating down the price of the business.
Doing so also gives the seller reason to help you out more in running and managing the business.
2. Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.
If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.
3. Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.
You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.
Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.
4. Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.
The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.
5. Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.
Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.
Taking Out a Loan
Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.
Own or seek to own a small business as defined by the SBA. This information can be found on their website.
Plan to operate for profit.
Plan to operate within the United States or its possessions.
Have your own assets invested in the business.
Show a need for the loan.
Not owe the US government any money.
Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.
If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.
Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:
Equity in your own home.
Assets owned by the business, like accounts receivable and inventory.
A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.
Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.
Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.
Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.
You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.
Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:
Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.
Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.
Financing the Purchase With Your Own Assets.
Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.
Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.
Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.
Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.
Bringing On Investors or Partners.
Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.
In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.
Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.
Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.
Angel Investors can be located by visiting the Angel Capital Association's website.
Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.
Getting Seller Financing
Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.
Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.
Obtaining seller financing may give you more power in negotiating down the price of the business.
Doing so also gives the seller reason to help you out more in running and managing the business.[
Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.
If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.
Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.
You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.
Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.
Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.
The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.
Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.
Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.
Taking Out a Loan
Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.
Own or seek to own a small business as defined by the SBA. This information can be found on their website.
Plan to operate for profit.
Plan to operate within the United States or its possessions.
Have your own assets invested in the business.
Show a need for the loan.
Not owe the US government any money.
Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.
If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.
Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:
Equity in your own home.
Assets owned by the business, like accounts receivable and inventory.
A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.
Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.
Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.
Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.
You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.
Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:
Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.
Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.
Financing the Purchase With Your Own Assets.
Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.
Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.
Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.
Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.
Bringing On Investors or Partners.
Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.
In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.
Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.
Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.
Angel Investors can be located by visiting the Angel Capital Association's website.
Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.
Getting Seller Financing
Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.
Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.
Obtaining seller financing may give you more power in negotiating down the price of the business.
Doing so also gives the seller reason to help you out more in running and managing the business.[
Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.
If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.
Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.
You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.
Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.
Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.
The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.
Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.
Seek purchase order funding. If you resell goods, then you might need a loan to pay your suppliers. In particular, a large order might require that you make additional investments in your company. With purchase order funding, the finance company will pay the supplier directly.
This type of financing works only if your markup is sufficiently large. You’ll need a gross profit margin of at least 30%.
You can contact a financing company about this type of funding.
Get an advance against your invoices. “Factoring” is a funding technique where you get an advance against your invoices. If your clients are slow to pay, then factoring can provide you with the cash you need. You may immediately get around 80% of the invoice value. When your client finally pays, you get the remainder less any fee charged.
You’ll only qualify if your clients have good credit. For example, government or reputable commercial clients are best.
Perform your research before working with a factoring company. Ask if they work with businesses of your size and ask about their experience. Also check if they have a minimum that you must factor.
Ask friends or family for a loan. People who know you can also lend money to finance your business. This is probably an ideal option if you are borrowing a small amount of money.
Approach family with the seriousness that you would a bank. Explain why you need the money and how you intend to pay it back.
Consider paying your lender interest. This will also show that you are serious and not looking for extra money to spend on luxuries.
Write up a promissory note and sign it. This will bind you contractually to paying back the money.
Withdraw money from your retirement account. You can finance a start-up or an existing business by using your IRA or a prior employer’s 401(k) account. You have to roll over your current funds into a retirement plan created for the business. The plan then uses the proceeds to buy stock in the corporation.
This is a complicated procedure, and you should hire a financing firm to help you with the process. Check how much the company charges and whether they charge a monthly advisory fee.
Also think carefully before using your retirement savings to finance your business. You had earmarked this money to support you when you retire. If your business folds, then you’ll lose these savings.
Use a credit card. Depending on how much money you need, you might use a credit card.[23] Credit cards are a good option if you can get an introductory 0% rate for 12 months or more. Remember the following tips for credit cards:
Make sure to get a business credit card. You want to keep your business and personal expenses separate. If you commingle them, then it looks like your business isn’t really a separate entity, which could hurt you if your business is structured as an LLC or corporation.
Use the card wisely. It’s probably not a great idea to use the credit card for big purchases, like equipment. Instead, seek an equipment loan. Use your credit card instead for short-term financing, such as to pay travel expenses.
Raise money through crowdfunding. You can get funding for one-off ideas, such as writing a screenplay or financing the creation of a rap album. You create an account with a crowdfunding site, and people who visit the site can donate to your project.
Crowdfunding is only for small, discrete projects, not long-term financing for a continuing business.
Common crowdfunding sites include Indiegogo, RocketHub, and Peerbackers.[26] Visit these sites and read up on their terms and conditions.
Take a home equity loan. Your home may be the largest asset you own. Accordingly, banks will lend to you if you use your home as collateral. You can get an equity loan or a home equity line of credit (HELOC), which you can use to fund your business.
With a home equity loan, you get a lump sum and pay it off in equal monthly installments. By contrast, a HELOC acts like a credit card. You use what you need up to a limit and then pay it back.
Talk to a lender about the terms and conditions of taking a home equity loan or a HELOC. Compare interest rates and how much time you’ll have to pay off the loan.
Using your home as collateral shouldn’t be your first option. If your business fails, then you will lose your home.
Search for grants. You might be able to get a grant from the federal, state, or local government. Some non-profits also provide grants to businesses. Grants are often given to support emerging technologies and are typically reserved for specialized businesses. Grants are not a good option for most businesses.
However, if you think you might qualify, then check your local business development office to see what is available.
You can also use the BusinessUSA Financing Tool, which is available here: https://business.usa.gov/access-financing.
Tips.
Franchises have additional funding options. For example, the franchisor may be willing to lend you money. You should ask franchisors whether they extend funding to potential franchisees.
When it's time to finance a business, there can be substantial work involved to facilitate this step. Every small business is different, and businesses in different industries and sectors have different ways of going about getting credit. There are various costs which widely range over the span of particular sectors. However, for the core process of securing the financial assistance that a business owner needs for a start up, some basic guidelines and principles will help create effective programs and a solvent business model. Estimate the costs of doing business, find out what you need to borrow money, and then research your financing options.
Estimating Costs of Your Business.
Determine the one-time costs of your business. These are costs that will only occur at the very beginning of opening your business. These include mileage (getting to a location), market research, advertising, and training. You will also need to look up any fees which will occur, such as a lawyer or consultant fee.
Calculate the recurring costs of your business. These are costs that you will have to pay over and over again, usually on a weekly, bi-weekly, or monthly basis. These include costs of utilities, insurance, wages, etc. Recurring costs are generally larger than one-time costs, and span a length of 10-30 years depending on your financing options. Calculate not only the total cost over the lifespan of your business, but also that on a yearly, and bi-yearly basis.
Ascertain whether costs are fixed, or variable. Fixed costs are those which will not change. The cost of your utilities, or your administrative costs are all fixed. Variable costs are those which will change over time. This includes wages, insurance, and shipping/packaging costs. The best way to keep all this information organized is to create a spreadsheet (use Excel). That way you can graph out this information, and view it multiple ways(bar graph, line chart, etc.).
Create a balance sheet. If you are just starting a small business, it is important that you write out balance sheets, which include: assets, liabilities, and equity. Each of these three categories will help you keep track of the finances of your business, and make it easier to pay your bills.
Liabilities = current liabilities(accounts payable, accrued expenses, notes payable, current long-term debt) + non-current liabilities(non-current long-term debt, notes payable to shareholders and owners, contingent liabilities)
Equity = Assets - Liabilities
Develop a cash flow analysis. This measures money which goes in and out of your business. This is then broken down into operational activities, investment activities, and financing activities. This analysis will help you determine when you break even, and can start reinvesting/expanding your business. Once more, the best way to do this is to create a spread sheet. Find all of your financial statements and gather them together before you start to analyze.
Operational = net income, loses of business, sales, and business expenditures.
Investment = purchases and sales of property, assets, securities, and equipment.
Financing = cash flows of all your loan borrowing and repayment.
Borrowing Money for Your Business.
Use equity financing to start your business. Equity financing usually comes from a primary investor, or other business. They will provide you a sum of money, in exchange for part-ownership of your company. This is a good option because investors look further down the road than a loan company, and you will have more money on hand. However, the investors will naturally want to interfere, and change aspects of your business model.
There are networks online which can set you up with a primary investor.
You can also check out private equity firms, which contain a vast array of specialized and experienced investors.
Remember, that small business owners generally use very little equity financing. It all depends on your business model, and the potential for growth.
Start your business using debt financing. Debt financing is when you take out a loan, usually from a bank or lending institution. This is a great option because the bank will have no say in how you run your business. The loan is tax deductible, and you can get short-term or long-term loans. However, you must have the loan repaid in a certain amount of time, and if you don't, you could have a hard time getting capital investment.
Talk to your local bank, or lending institution about the qualifications for specific loans. You will probably have to fill out some paperwork to determine whether or not you are qualified.
When using a local bank, you may be able to set up a personal relationship. This way, you can postpone a few payments if you fall on hard times.
Find out about credit scores and ratings. The higher your score is, the less risky you are to investors. In many cases, the initial business loan will be based on the borrower's own personal credit score. However, in some cases where a business is already operational, a business plan and other documents can provide for a different kind of credit specifically for the continued operations of that enterprise.
Use the online company TransUnion or EquiFax to determine your credit score. It is important to get an independent analysis, otherwise your own calculated score could be biased.
The main focus of the score is how long you have maintained a credit line, and how many monthly payments you have made on time.
If you have no prior experience taking out credit, it may be hard to get a loan. It is best to start using a credit card on small things like gas, or grocery store trips. Then gradually build up. Show the creditors you are a responsible client.[12]
Maintain an adequate debt to equity ratio. You want to make sure that the total debt and liabilities of your business is no more than four times the equity in the business. Equity simply means any retained earnings and cash injections by investors. In order to start out with equity, the owner of the business usually has to put in anywhere from 20-40%. This will maintain an adequate debt to equity ratio, and allow you to get a loan.
Put up collateral to start your business. Before you get a loan, the lending institution or bank will ask for collateral. This means you risk some of the items you own. In the case you cannot repay the loan, the bank can seize your property. Collateral usually includes homes, cars, furniture, equipment, stocks, bonds, etc. this is a scary proposition, so you need to be sure that your business will be financially successful beforehand.
Shop around for different lenders. There are a variety of lenders who may or may not be willing to issue new business loans, and all of these potential lenders have their own terms and conditions. Talk to various lenders and ask them about what kinds of loans are available. Evaluate loans by timeline. Lenders will offer various short-term, long-term or revolving-credit loans to business owners. Look at which ones suit the needs of a startup the best.
Look at secured and unsecured business loans. Secured loans actually use existing assets as collateral. For example, the person trying to start a business can use his or her home, or other property, as collateral and get lower interest rates for the loan. However, this leaves the assets vulnerable to seizure in cases of nonpayment. Unsecured loans rest solely on the borrower's credit score. See which of these types of loans best matches desired risk.
Select the best deals. You want a loan that has the lowest interest rates and most favorable terms for repayment.
Financing Your Business.
Get a bank loan. Small, local banks have received more strict standards after the financial crash of 2008. However, large investment banks such as JP Morgan Chase and Bank of America have received a set of moneys from the Federal Reserve to lend out to small businesses. This is your best option to go with, although it takes the long to pay off. Local banks will set you up with a contract, and a monthly payment. The other benefit is that you can get this loan postponed if you are having trouble paying it off.
Place your home up as collateral. Banks will generally allow you to borrow up to 75-80% of your home's worth, as long as you have at least 10-15% already down on your home. This is great because the loan will have a much lower interest rate than a credit card. Talk with your financier, or local mortgage company for more detailed information.
Use your credit card. This is a very dangerous game to be played. You need to stay on top of your monthly payments. If you fall behind, you get trapped in a death spiral. However, when carefully managed, credit cards can be great to get out of an emergency. Only use a credit card occasionally, when you are experiencing a hole you know that you can get out of.
Tap into your 401(k) plan. You will need a financial expert who can start up a C Corporation which you can then roll your retirement assets into. This is also a risky business, because you are tapping into your nest egg. This should only be done if you have more money put away in a savings account, or if you are independently wealthy.
Try loaning money from your friends and family. Ask who would be willing to make a contribution, or purchase a percentage of the company. Go about asking members of your church for donations. Let local businesses to partner with you. You might make some acquaintances, and make some deals (you make cheese, they make wine, a chance to exchange).
Pledge your future earnings. Some companies, or peoples, are willing to gamble and put money upfront, if you are willing to commit a certain percentage of future profits. This is a gamble because they, and you, are betting that you will be able to earn enough in the future. There is usually a contract involved, guaranteeing that they will at least get some money back, so keep that in mind.
Kickstart your business. Crowd funding, in the age of the internet, has become a very popular way to finance businesses. Write a description of your business idea online, at sites like Kickstarter, and convince people to donate to your business. You will want to be really descriptive, and excited in your word choice. The downside of this is that it could take months or years before you raise enough money.
Secure an SBA loan. SBA (Small Business Administration) is a branch of the Federal Government that supplies loans to businesses struggling to get off the ground. However, there are a number of qualifications. You had to have been denied a loan from another bank before. You have to meet the government's definition of a small business. You will also have to meet other restrictions, depending on the type of SBA loan. Go to the SBA's website, and fill out a form if you think you might meet these qualifications.
Attract an angel investor. These are wealthy individuals who like to bet on the financial success of start-up businesses. Angel investors are usually found at private-equity, and venture capital firms. You will want to bring someone older, who looks like he has had experience in business before. Be passionate about your idea when you present, and know all of the financial details before you walk in the room. Keep in contact with the investor days and weeks after your initial meeting.
Tips.
Talk to numerous lending institutions before you pick a loan. Some will have better interest rates, while others will have better repayments.
Consult with family members first. Getting a small loan from them can avoid dealing with greedy credit lenders.
Get some experience in the business before you start your own. If you want to start a restaurant, make sure you have worked in a restaurant before. If not, you will wind up purchasing outside help which will cost you astronomical amounts of money.
Warnings.
Talk to a lawyer and a financial advisor to avoid colossal mistakes. The biggest regret of many first-time small business owners is not consulting with a professional before they begin the process.
If you are a person living paycheck-to-paycheck, it is best to wait to start a small business. If the business goes down hill quickly, you could lose your assets, and your life savings.
Take a year to save up money and make a detailed plan. You do not want to go into small business owning head first.
When it's time to finance a business, there can be substantial work involved to facilitate this step. Every small business is different, and businesses in different industries and sectors have different ways of going about getting credit. There are various costs which widely range over the span of particular sectors. However, for the core process of securing the financial assistance that a business owner needs for a start up, some basic guidelines and principles will help create effective programs and a solvent business model. Estimate the costs of doing business, find out what you need to borrow money, and then research your financing options.
Estimating Costs of Your Business.
Determine the one-time costs of your business. These are costs that will only occur at the very beginning of opening your business. These include mileage (getting to a location), market research, advertising, and training. You will also need to look up any fees which will occur, such as a lawyer or consultant fee.
Calculate the recurring costs of your business. These are costs that you will have to pay over and over again, usually on a weekly, bi-weekly, or monthly basis. These include costs of utilities, insurance, wages, etc. Recurring costs are generally larger than one-time costs, and span a length of 10-30 years depending on your financing options. Calculate not only the total cost over the lifespan of your business, but also that on a yearly, and bi-yearly basis.
Ascertain whether costs are fixed, or variable. Fixed costs are those which will not change. The cost of your utilities, or your administrative costs are all fixed. Variable costs are those which will change over time. This includes wages, insurance, and shipping/packaging costs. The best way to keep all this information organized is to create a spreadsheet (use Excel). That way you can graph out this information, and view it multiple ways(bar graph, line chart, etc.).
Create a balance sheet. If you are just starting a small business, it is important that you write out balance sheets, which include: assets, liabilities, and equity. Each of these three categories will help you keep track of the finances of your business, and make it easier to pay your bills.
Liabilities = current liabilities(accounts payable, accrued expenses, notes payable, current long-term debt) + non-current liabilities(non-current long-term debt, notes payable to shareholders and owners, contingent liabilities)
Equity = Assets - Liabilities
Develop a cash flow analysis. This measures money which goes in and out of your business. This is then broken down into operational activities, investment activities, and financing activities. This analysis will help you determine when you break even, and can start reinvesting/expanding your business. Once more, the best way to do this is to create a spread sheet. Find all of your financial statements and gather them together before you start to analyze.
Operational = net income, loses of business, sales, and business expenditures.
Investment = purchases and sales of property, assets, securities, and equipment.
Financing = cash flows of all your loan borrowing and repayment.
Borrowing Money for Your Business.
Use equity financing to start your business. Equity financing usually comes from a primary investor, or other business. They will provide you a sum of money, in exchange for part-ownership of your company. This is a good option because investors look further down the road than a loan company, and you will have more money on hand. However, the investors will naturally want to interfere, and change aspects of your business model.
There are networks online which can set you up with a primary investor.
You can also check out private equity firms, which contain a vast array of specialized and experienced investors.
Remember, that small business owners generally use very little equity financing. It all depends on your business model, and the potential for growth.
Start your business using debt financing. Debt financing is when you take out a loan, usually from a bank or lending institution. This is a great option because the bank will have no say in how you run your business. The loan is tax deductible, and you can get short-term or long-term loans. However, you must have the loan repaid in a certain amount of time, and if you don't, you could have a hard time getting capital investment.
Talk to your local bank, or lending institution about the qualifications for specific loans. You will probably have to fill out some paperwork to determine whether or not you are qualified.
When using a local bank, you may be able to set up a personal relationship. This way, you can postpone a few payments if you fall on hard times.
Find out about credit scores and ratings. The higher your score is, the less risky you are to investors. In many cases, the initial business loan will be based on the borrower's own personal credit score. However, in some cases where a business is already operational, a business plan and other documents can provide for a different kind of credit specifically for the continued operations of that enterprise.
Use the online company TransUnion or EquiFax to determine your credit score. It is important to get an independent analysis, otherwise your own calculated score could be biased.
The main focus of the score is how long you have maintained a credit line, and how many monthly payments you have made on time.
If you have no prior experience taking out credit, it may be hard to get a loan. It is best to start using a credit card on small things like gas, or grocery store trips. Then gradually build up. Show the creditors you are a responsible client.[12]
Maintain an adequate debt to equity ratio. You want to make sure that the total debt and liabilities of your business is no more than four times the equity in the business. Equity simply means any retained earnings and cash injections by investors. In order to start out with equity, the owner of the business usually has to put in anywhere from 20-40%. This will maintain an adequate debt to equity ratio, and allow you to get a loan.
Put up collateral to start your business. Before you get a loan, the lending institution or bank will ask for collateral. This means you risk some of the items you own. In the case you cannot repay the loan, the bank can seize your property. Collateral usually includes homes, cars, furniture, equipment, stocks, bonds, etc. this is a scary proposition, so you need to be sure that your business will be financially successful beforehand.
Shop around for different lenders. There are a variety of lenders who may or may not be willing to issue new business loans, and all of these potential lenders have their own terms and conditions. Talk to various lenders and ask them about what kinds of loans are available. Evaluate loans by timeline. Lenders will offer various short-term, long-term or revolving-credit loans to business owners. Look at which ones suit the needs of a startup the best.
Look at secured and unsecured business loans. Secured loans actually use existing assets as collateral. For example, the person trying to start a business can use his or her home, or other property, as collateral and get lower interest rates for the loan. However, this leaves the assets vulnerable to seizure in cases of nonpayment. Unsecured loans rest solely on the borrower's credit score. See which of these types of loans best matches desired risk.
Select the best deals. You want a loan that has the lowest interest rates and most favorable terms for repayment.
Financing Your Business.
Get a bank loan. Small, local banks have received more strict standards after the financial crash of 2008. However, large investment banks such as JP Morgan Chase and Bank of America have received a set of moneys from the Federal Reserve to lend out to small businesses. This is your best option to go with, although it takes the long to pay off. Local banks will set you up with a contract, and a monthly payment. The other benefit is that you can get this loan postponed if you are having trouble paying it off.
Place your home up as collateral. Banks will generally allow you to borrow up to 75-80% of your home's worth, as long as you have at least 10-15% already down on your home. This is great because the loan will have a much lower interest rate than a credit card. Talk with your financier, or local mortgage company for more detailed information.
Use your credit card. This is a very dangerous game to be played. You need to stay on top of your monthly payments. If you fall behind, you get trapped in a death spiral. However, when carefully managed, credit cards can be great to get out of an emergency. Only use a credit card occasionally, when you are experiencing a hole you know that you can get out of.
Tap into your 401(k) plan. You will need a financial expert who can start up a C Corporation which you can then roll your retirement assets into. This is also a risky business, because you are tapping into your nest egg. This should only be done if you have more money put away in a savings account, or if you are independently wealthy.
Try loaning money from your friends and family. Ask who would be willing to make a contribution, or purchase a percentage of the company. Go about asking members of your church for donations. Let local businesses to partner with you. You might make some acquaintances, and make some deals (you make cheese, they make wine, a chance to exchange).
Pledge your future earnings. Some companies, or peoples, are willing to gamble and put money upfront, if you are willing to commit a certain percentage of future profits. This is a gamble because they, and you, are betting that you will be able to earn enough in the future. There is usually a contract involved, guaranteeing that they will at least get some money back, so keep that in mind.
Kickstart your business. Crowd funding, in the age of the internet, has become a very popular way to finance businesses. Write a description of your business idea online, at sites like Kickstarter, and convince people to donate to your business. You will want to be really descriptive, and excited in your word choice. The downside of this is that it could take months or years before you raise enough money.
Secure an SBA loan. SBA (Small Business Administration) is a branch of the Federal Government that supplies loans to businesses struggling to get off the ground. However, there are a number of qualifications. You had to have been denied a loan from another bank before. You have to meet the government's definition of a small business. You will also have to meet other restrictions, depending on the type of SBA loan. Go to the SBA's website, and fill out a form if you think you might meet these qualifications.
Attract an angel investor. These are wealthy individuals who like to bet on the financial success of start-up businesses. Angel investors are usually found at private-equity, and venture capital firms. You will want to bring someone older, who looks like he has had experience in business before. Be passionate about your idea when you present, and know all of the financial details before you walk in the room. Keep in contact with the investor days and weeks after your initial meeting.
Tips.
Talk to numerous lending institutions before you pick a loan. Some will have better interest rates, while others will have better repayments.
Consult with family members first. Getting a small loan from them can avoid dealing with greedy credit lenders.
Get some experience in the business before you start your own. If you want to start a restaurant, make sure you have worked in a restaurant before. If not, you will wind up purchasing outside help which will cost you astronomical amounts of money.
Warnings.
Talk to a lawyer and a financial advisor to avoid colossal mistakes. The biggest regret of many first-time small business owners is not consulting with a professional before they begin the process.
If you are a person living paycheck-to-paycheck, it is best to wait to start a small business. If the business goes down hill quickly, you could lose your assets, and your life savings.
Take a year to save up money and make a detailed plan. You do not want to go into small business owning head first.
