This is part three of a four-part series written on obtaining funding for a startup company.
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So far, I've discussed obtaining funding from friends and family members and getting venture capital money.
In this third article, I want to discuss the benefits or using what I call traditional borrowing. To me this is borrowing money from a financial institution or an SBA-approved lender.
This is not a last stitch attempt to gain funding after family and venture capital firms did not work out. In fact, I suggest using this as a primary source of lending in order to build your companies credit rating.
While my co-founders and I were searching for funding options we found that, with a little collateral, the SBA is willing to loan to most startups. This is not to say that it is any easier than other types of borrowing, but it may be that the SBA as a government-sponsored agency and the FDIC-insured financial institutions feel more protected in their investment and see that their risk is minimized as compared to a private investor.
Of course, it isn't necessarily easy to get a bank loan. Instead of a simple contract with an investor or simply selling an interest in future earnings, you will find yourself filling out enough paperwork to purchase several homes.
To get a business loan from a bank, you will most likely also be required to provide a lot of background information on yourself in order to prove your trustworthy standing and strong personal credit rating.
One bad thing about this type of borrowing is that if you default on payments it will typically affect your personal credit rating. This is because you are usually the guarantor on the loan unless you have levied your share in the company. Typically though, small startup companies are LLC or sole proprietorship type companies. As such, this would require a personal guarantee from all parties involved and maybe a showing of personal investment in the venture.
For us, this personal investment or evidence of injection in the company was a twenty percent investment requirement. This is very similar to a home loan where they require twenty percent down in order to finance the remaining eighty percent.
In conclusion, it's always good to talk to your local small business banker. Keep in mind all types of lending.
Don't overlook any opportunity to succeed, and raise all the capital you need.
On that note, in my fourth and final article on raising money for a business, I will help you learn how much money you need to start a business, which will help you define how much you'll have to raise from various business funding sources.