The Small Business Administration offers loans to businesses starting up

Author: Randy Lang

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Many people talk about starting their own business, but few will actually go through with it. Starting your own business can be very time consuming and very expensive. Not everyone has a stash of money put aside that allows them to follow their dreams. For many people, coming up with the money to start their adventure is their biggest hindrance. If you are looking at making your dream job a reality, there are options available to help get your company on its feet. Once you have a way to get your company the money it needs to start, you can begin putting your business plan into action.

First and foremost you can look at yourself and see what money or assets you have available to fund your business venture. If you have extra money, starting up your business could be a simple process. You don’t have to worry about getting approval from outside sources as to whether or not they believe your company will succeed. The downside is, it can completely wipe you out if the business doesn’t succeed. If you have a good sized savings account, you may want to use that to start your business. Using your own money shows how much you believe in your product. You have worked hard for your money, and will want to use it on something you truly believe in. This shows commitment to other people. There may be investors down the road who see that you were willing to stake everything you own into your own company, which could result in them wanting to invest into your company. You also may consider selling any property, stocks, or family heirlooms to help raise money to start your business. Another personal option is a credit card. This method can prove to be a quick and easy way to get cash fast. Sometimes we forget that credit cards are also in the business to make money. They can have very high interest rates on any unpaid balances. When a business is first starting up, it can be difficult to make a high enough income that would pay off the credit card balances. Not being able to pay the balances off is going to result in high interest charges. There are many credit card companies out there, make sure you do your research and find one that works for your company. Many have different reward programs available, such as cash back for business purchases, this could help benefit your company. Many cards also offer an introductory rate offer where they might give twelve months interest free, or some other incentive. Make sure to shop around and find a credit card company that works for you and your needs.

Many people don’t realize that they can use their 401K or IRA accounts. Now there can be penalties associated with accessing the money from your 401K or IRA, which is why it would be best to speak with your advisor regarding what your options are. There are financial options available where you could borrow up to a certain amount of your 401K and use that money as start up money for your business. Simply withdrawing the money from your 401K or IRA will result in being heavily taxed on that money. It is best to talk to a financial planner and have them advise you on what options are available for you and your type of business.

You could apply for a loan at a bank. While credit cards may have a high interest rate, a bank loan would give you a much lower rate. However, getting the loan may be more difficult than acquiring a credit card. Some businesses may not have any collateral to put up against the loan, making the bank a little more leary of lending out any money. If by chance you own land or a car outright, you could always use the titles to secure the loan with. But if that is not an option, consider having a co-signer on the account who has above average credit and can help guarantee the loan will be paid back.

If obtaining a loan of any sorts isn’t an option, you could always try turning to friends and family. These are the people who know you the best, maybe you have already discussed with them your plans to start your company. They may be persuaded a little more easier than a bank worker who doesn’t know you from Adam would. Friends and family may be willing to look beyond your past credit and be more willing to take the risk with you. Also, friends and family will typically have a lower interest rate than banks and credit cards would offer. Borrowing money from friends and family is actually the number one way most small businesses have been started. While it may seem like an easy and painless option, there are drawbacks as well. Relationships have been known to suffer when money is involved. When you are late with payments on your bank loans or credit cards, people don’t typically even know. If you are late with payments to a family member or friend, chances are it will get out. Things could definitely get awkward at gatherings. Money can definitely change people. If you decide that borrowing from friends and family is what you want to do, just make sure that everything is put in place. Make sure there is a contract that is signed, where everything is detailed out nice and clear. Money is not worth ruining relationships. Having everything clear and concise is best for both parties involved.

Venture Capital is capital that is invested in a project where there may be an element of risk, such as starting a new business. Venture capital firms will invest in a company in exchange for equity in the business. These firms are a little more picky about which businesses they want to invest in. They typically will only invest in a company that has already been established and has proof that it is a profitable business. So this option may not work for the actual start up of a company, but if the company has already started and is able to expand and grow. Venture Capital firms invest because they hope to cash out their portion of the company when the company either becomes public or is bought by another larger company. Venture Capital firms typically receive about one thousand proposals from companies to invest. They look for companies that typically need at least $250,000. Once again, they are looking for companies that are geared toward booming quickly. They want to be able to see that the company has grown and succeeded, because they want their investment to pay out quickly and successfully.

The Small Business Administration offers loans to businesses starting up. One type of these loans is called the 7(a) program. This is one of the most common loans that will fund small businesses. It is typically used to start the new business, but can also be used to expand a business that is ready for growth. While there is no stated minimum on the 7(a) loan, the Small Business Administration has said that they won’t fund a loan that is more than five million dollars. On loan amounts up to $150,000 the Small Business Administration will guarantee up to 85% of the loan. If the loan is over $150,000 they will guarantee up to 75% of the loan. The Small Business Administration requires that the owner of the business have at least a 20% stake in their company. This helps guarantee that the loan will be repaid. There are a few restrictions on obtaining a 7(a) loan. The loan cannot be used to pay any delinquent taxes, finance any changes in the ownership of the business, it can’t refinance a debt where the lender is in a position to sustain a loss resulting in the Small Business Administration obtaining that loss from the refinancing process. It also can’t repay any equity investments that have been made into the business. It is important that any business that applies for a 7(a) loan meets with all these requirements.

The 7(a) loan also won’t loan out money if an owner of the business who has 20% stake in the company, has been incarcerated, is on probation or parole, or has been indicted for a felony or crime of moral depravity. They also make sure that the company hasn’t defaulted on any other government loans. The Small Business Administration will not lend money to businesses who are in the business to lend out money, are operated outside of the United States, business that receive more than one third of their income from gambling, businesses that teach, instruct, or counsel religions teachings, or businesses that are part of a pyramid distribution plan.

Interest rates on the 7(a) loans will vary depending on lenders, the amount of the loan and your credit history. But the Small Business Administration does set a cap on the maximum spread that a lender can add to the prime rate. Loans that are more than $50,000 and have a term of seven years or less, the spread is limited to 2.25%. If a loan is more than $50,000 and will mature in more than seven years, the spread is 2.75%. If a loan is less than $50,000 the lender is able to have a higher spread. It can be somewhere in the range of 3.25% to 4.75%. It all just depends on the size of the loan and how long the term of the loan is.

The 7(a) loan may also have fees attached to it. If the loan is less than $150,000 there will not be any added fees. If the loan is greater than $150,000 and the term is less than a year, the Small Business Administration sets a fee of .25% of the portion of the loan that it will guarantee. If the loan is between $150,000 and $700,000 and the term is greater than a year, the fee is 3%. If the loan is greater than $700,000 the fee will rise to 3.5%. These fees are typically paid by the lender. But there is the option to include the fees into the closing costs.

Microloans are another option to get financing. These are offered through nonprofit community based lending organizations. The Small Business Administration Microloan Program will give loans up to $50,000 that are designed to cover start up and expansion costs for businesses. People can use these microloans to purchase any equipment, supplies or inventory that the business may need. One restriction on the Microloan is that it cannot be used to pay any existing debt. The Small Business Administrations requires that all Microloans be paid within six years. The interest rate associated with these loans are negotiated between the lender and borrower, but they will usually be around 8% to 13%. Microloans typically have some specific requirement linked to them. This includes personal guarantees and some form of collateral. The borrower may also be required to take some business training courses in order to qualify for the loan. These Microloans are typically designed toward people who may not have strong credit scores.

Have you ever heard of an Angel Investor? An Angel Investor is an individual who is well off and looks for start up companies to invest in. With investing in these start up companies, they will require an equity stake in the business. Angel Investors will find success in certain industries and will typically stay within that industry to find new companies that are starting. Since they typically stay within the same industry, they are able to not only offer financing options, but they are also able to offer guidance and knowledge based on their previous experiences. They also typically have contacts within that industry that they are able to put you in contact with to help open pathways for your business. Angel Investors will normally do about one to three deals a year. These deals will typically be in the $25,000 to $100,000 range. Angel Investors will meet with about fifteen to twenty potential candidates a month. That is a lot of potential new businesses. It may seem that the odds of securing an Angel Investor aren’t very high, but it is still higher than securing a deal with a venture capitalist. If you want to try your shot at an Angel Investor, you can start by reaching out to their offices, calling and trying to get an appointment scheduled. If you attend an investment conference, try to find an Angel Investor and start talking to them. The time that you spend with an Angel Investor is going to be short and sweet, you need to make sure that you are prepared and you can wow them with your business. Make sure that you have practiced your speech over and over again. It needs to be short and to the point. You need to wow them with your product or service. It needs to be clear as to why your business is better than others. You need to convince them that they should take a chance on you. Once again, your window to secure a deal with an Angel Investor is so short, you need to make sure you are prepared with what you are going to say and make sure that it is said in a way that sells your business in the best light possible.

A business incubator is an organization that is dedicated to providing both services and support to fledgling companies. This is helpful for people that have a really good idea to start up a business, but have no idea how to run a business. They need guidance and the funding to get the business off the ground floor. These business incubators are run by different agencies, such as venture capital firms, government agencies and universities. The goal of these business incubators is to help nurture the beginning stages of the business. They provide help with marketing, the infrastructure, networking and finance assistance. Getting into a business incubator can prove to be a difficult task. To be accepted into the program, you would have to fill out an application that is quite long and can be quite the process. The requirements differ between each business incubator, but it is very important that you show the organization that you can succeed with starting and running a business.

Crowdfunding is the practice of funding a venture by raising small amounts of money from various people. This typically happens thru the internet. One of the most popular crowdfunding websites people are familiar with is Kickstarter. Kickstarter has allowed artists, entrepreneurs, charities and individuals to make appeals online for cash. Before people consider putting their requests online for crowdfunding, it is important to understand a few things about it. First of all, some crowdfund platforms will hold onto the money until the amount raised reaches the goal of the entrepreneur. If the goal does not get met, the funds will sometimes not be returned to the individual donors. Also remember that the crowdfunding source will take a portion of the money raised. This is how the organization is able to make a profit.  To make your appeal online to potential donors you will need to make sure that you attract people to your project. The better story of why you want to start up your company the better. Appeal to the human interest in people. It is helpful to also add an incentive to the donors in exchange for their money. A free shirt or product of when the company is up and going may help people decide to donate to your cause. Sometimes adding a video of yourself appealing to the masses helps as well. It is important for the donors to see how committed you are to your company. Donors want to see that you are putting in the effort and the time and some of your own money into this company that you are asking money for.

Peer to Peer loans is the practice of lending money to businesses or individuals through online services that match lenders with borrowers. There are Peer to Peer platforms that allow the borrower to post a request. They state how much they are wanting for a loan and what the reason for the loan is. After the information is submitted, the investors will review the requests. You may have a few different investors that are willing to loan different amounts that will add up to the amount you have requested. The loan will then be funded and payments will be made through the Peer to Peer platform. Through the platform the payments will be split up and paid back to the different investors. These loans typically have higher approval rates compared to loans from traditional banks. These loans typically will have lower interest rates than a traditional bank, along with lower fees as well. But the basic steps to lending will still apply. You will still have to fill out an application and provide any financial documentation that is needed.

As you can see, there are many different options that are available to help start your business. Obviously it would be so much easier if we were all just filthy rich and could start up a new company with your own money and not have to worry about financing and lending at all. But chances are, we don’t fall into that category. Obtaining the financing to start a new business takes serious planning and education. It is important to weigh the pros and cons of each option. Which option can give you the cash when and where you need it? Don’t be afraid to mix and match your options for financing. You don’t have to pick one option and stick with it. You can apply with multiple sources and see which one will give you the best rate and fees.

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