Nobody disputes that debt financing is an attractive way to fund your business.
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In contrast to equity financing, it doesn't involve giving up ownership in your company.
When your business is doing well, you can pay down your debts.
The problem is it's tough to find debt financing if you are a new business.
Banks are looking for low credit risk. New businesses are considered to be risky. Moreover, they don't have many assets so it's difficult to secure the loan with any collateral.
A few realistic options available to you for debt financing include:
- Get a loan from friends and family - If you have close friends or relatives who want to see you succeed, ask them for a startup loan to start your business or take it to the next level. It can be awkward asking people from money, but it's necessary if you need funding and don't have any other options. Be aware that losing a relative's money can ruin a relationship. Even if you don't get money from them, it can ruin a relationship. The idea that a relative with money to spare won't invest in you can be downright insulting.
- Credit-card debt - The nice thing about credit card debt is you can just make the minimum payment. The problem is that the interest rates can be high. Usually, however, you can find lower rates if you shop around. In contrast to friends and family, who may forgive you if you cannot repay a loan, credit card companies will chase after you. Over reliance on credit card debt could result in your having to close down your business or even result in personal bankruptcy or a disastrous credit record.
- HELOC - A HELOC is a home equity line of credit. Banks give them out easily and quickly, plus the rates are usually very reasonable. That's the good news. The bad news is that borrowing against your home to start a small business is very risky. If things don't go well in your business, you might end up losing your house altogether.
- Government Loans - The federal Small Business Administration has been a great lending resource for small business owners. The most popular lending program is LowDoc. Those loans are up to $100,000 and you usually get up to 25 years to pay off the loan. Not a bad deal at all!
The financing methods for small businesses discussed above are the primary sources of debt financing for entrepreneurs. Sure, there are other forms of small business financing out there, but be realistic. Is a venture capitalist really going to invest in you? It's highly unlikely unless you've got a very unique business concept with enormous upside potential and some serious barriers to entry.
Don't be too eager to find debt financing. The best source of funding for your business is positive cash flow.
Instead of seeking a loan, maybe your time would be better off seeking a new and profitable customer.