Money For Nothing and Chicks For Free? Not.

So you’ve decided to go it on your own, work from home and build your own business. Was Dire Straits right when they said there’ll be, “money for nothing and chicks for free?”

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Not to be a wet blanket, but banks are unwilling to lend to small startups, and venture capital is simply out of the question unless you consider a friend or family ‘angel’ a form of venture capital. Dunno about the chicks issue, especially since women are active and successful business owners too.

The four most common source of capital for small startups are: 1) borrowed money from friends, family, or others who know you, love you, or like you; 2) personal credit card; 3) home equity loans; and 4) SBA loans.

Credit Cards:
Many a large business started with the owner’s pocket-full-of-plastic.

The good thing about using credit cards to finance your purchases is that you don’t have to go through an elaborate loan approval process to find out if you qualify. Fill out one short form and you’ll have your answer. And, if you pay your bills on time, you’ll be building a good credit history that will help you when it comes time to apply for a larger loan.

The bad news about credit cards is that because they’re so easy to obtain, it’s easy to get in over your head and wind up more debt than you can handle. So start slow! Be careful about buying more supplies than you need just because the per-unit price is lower at higher quantities. Don’t borrow more than you can repay if things don’t grow as quickly as planned.

Many credit card issuers have very low teaser rates (0-4%). Just be sure you either pay the balance before the rate changes (usually in a 3-6 months) or pay it off with another low rate credit card. Be careful to read the fine print on the credit card agreement. Some companies impose large late payment penalties, offer very short payment terms (20 days versus 30 days), charge a much higher rate for cash advances, and, in addition, charge huge one-time fees for exceeding your credit limit, late payments, or cash advances.

When using personal credit cards for your business you’ll want to keep the accounting tidy by making your payments with a business check. It’s also wise to isolate certain cards for purely business purchases.

Home Equity Loans:
Assuming you own your own home and your credit is good, a home equity loan is a fast and easy way to fund your business startup. Many lenders will lend you up to 95% (and even 100%) of your home’s value (less the balance on your first mortgage) but they will want to see that you have a steady income that will support the payment. In other words, don’t quit your day job! Home equity loans are easier to get than business loans, typically offer lower interest rates, the interest is usually tax deductible, and they offer the protection of consumer interest laws (which business loans do not). BUT, you are putting your house in jeopardy if you can’t make the payments so be careful you don’t bite off more than you can chew.

SBA Loans:
Go to http://www.sba.gov/ for details about the most common types of SBA loans. Specifically focus your reading on the 7a Loan Guarantee, the Low Doc loan, and the Microloan programs.

Beyond “friendly loans”, home equity loans, credit cards, and SBA loans here are some other common, and not-so-common bootstrapping ideas from our book, Finding Money: The Small Business Guide To Financing.

– Leasing
– Local loan / grant programs
– Local non-SBA microloan programs
– Ask your local religious organization if they make business loans
– Find someone to co-sign your loan application
– Find someone to pledge their certificate of deposit on your loan
– Pledge someone else’s home on your loan (be sure to ask first)
– Investigate available grants: http://www.sba.gov/expanding/grants.html
– Use free publicity (by doing a charity event, contest, or other newsworthy event)
– Offer free / low cost service to a big name client, local Chamber of Commerce, business association, or church in exchange for publicity, testimonials, introductions to other customers, office space, etc.
– Share office space with an established business
– Have customer buy your raw materials / inventory
– Barter
– Do joint promotions with other businesses to reduce advertising costs
– Joint venture or co-op with another business
– Generate free publicity by writing articles for local newspapers

Many seasoned business owners never master the art of handling their finances and therefore fail or never realize their full potential. If you handle this first financing attempt right, your efforts will set the stage for a lifetime of easy financing. So be sure to only borrow what you need / can afford, and make every single payment on time. Follow those two simple principles and you’ll have credit card companies and other lenders begging to lend you money when you’re more established–or, paradoxically, refusing to talk when you need money the most.

If you need help finding money for your business, check out our all new, fully revised eBook, Finding Money–Secrets of a Former Banker.

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