Guide to Financing Your Business

Take stock of your personal finances

The primary source for funding a new venture is personal finances. However, many experts say this method is the riskiest financing option. The reason: you're putting up your own collateral to finance your business. If you take out a second mortgage on your home or use a line of credit, you can wipe out your assets if your business falters. Other options such as credit card loans or tapping into personal savings are equally risky.

I recommend: Whether you decide to self-finance or seek an outside loan, check that your personal credit history is in tip-top shape with a credit report from Equifax, Experian or Trans Union. Since you don't have a business credit history, suppliers and lenders will base their decisions on your personal credit history.

Be prepared

No matter where you turn for capital, you'll need to provide solid documentation that your business concept is sound. Be prepared with a convincing business plan, cash flow projections and personal financial statements and tax returns. With the right materials, you can convince lenders and investors that you'll be able to repay the loan.

I recommend: Get help writing a business plan with Business Plan Pro software.

Friends and family connections

Money that's raised privately can be a boon, because it may be interest free or low interest. However, you should be aware that interest-free gifts may have tax implications. Loan requests should be professionally presented and include detailed financial projections. Avoid the temptation to forego formalities with loved ones. Draft a promissory note when getting a loan from friends or family so that interest payments are clearly detailed. Be prepared that if the business fails, it could damage personal relationships with investors.

I recommend: Download a promissory note template by clicking on your state at InternetLegalResearchGroup.com or at BusinessNation.com.

Go through banks or credit unions

If you can show that your business proposal is strong, you may be able to land a loan from your bank or credit union. These loans are issued in many types, with varying interest rates and maturity dates. Most are secured against hard assets, such as real estate or equipment.

I recommend: Before heading to a bank, visit your local Small Business Development Center. They can offer advice on how to make your presentation to bankers and direct you to banks that are start-up friendly.

Look for angel investors

Angel investors are individuals or groups that provide capital for business start-ups, often in exchange for ownership equity. More money is invested annually through angel investments than through venture capital financing.

I recommend: Find a directory of angel investment groups at the Angel Capital Association or send a request to find angel investors at GoBigNetwork.com.

Consider venture capital

Venture capitalists fund few start-ups and look to make large investments, typically over $1 million. However, the U.S. Small Business Administration (SBA) licenses and regulates the Small Business Investment Company Program (SBIC), which does make venture capital investments in start-up businesses.

I recommend: Check into the SBIC program to see if you can take advantage of this option.

Apply for an SBA loan

Nike and Apple Computer got their start with SBA equity loans. The money doesn't actually come from the SBA; it comes from participating banks. The SBA simply guarantees the loan, which helps budding entrepreneurs who might not normally qualify for a loan.

I recommend: Find out if there's an SBA loan that's right for your new venture.