Published July 24, 2012
Once you have made the decision to start your own company and developed a business plan, you will need funding to finance your dream. Among the most common questions I am asked is, "What type of business loan should I get?"
When considering capitalizing your small business, it’s important to understand the options available both when you start and later when you are ready to expand. Some people are able to obtain financial backing from family members at little or no interest. Most of us are not so fortunate, and family funding can be fraught with personal complications.
Many entrepreneurs fund their startups by using their life savings or "maxing out" their personal credit cards. This method conveys a sense of independence and makes for great anecdotes in interviews, but it is not an advisable means of funding a business. Credit cards have higher interest rates (often between 16-19 percent APR) than small business loans and thus using them is a more costly form of financing.
Sweat equity and personal investment demonstrate personal commitment to your enterprise, but if there are too many bumps in the road, you can quickly lose your life savings and have no fall-back for the future. It is hard to get a business loan or line of credit in the future if a lender determines that you have no personal cash on hand.
Using a home equity line of credit is another option that entrepreneurs often try. However, they can negatively impact your personal credit rating. Additionally, if your startup costs are $750,000 while your house is only worth $400,000, you cannot get enough funding from this method.
Crowdsourcing, which is done via social media to get family, friends and acquaintances to lend small amounts of money to small business owners, has gained in popularity during the past year. Younger, tech-savvy entrepreneurs are more likely to employ this means of raising capital that has proven effective for businesses that need smaller amounts of money. However, crowdsourcing has limitations; entrepreneurs seeking more than $50,000 may have a tough time generating what they need.
Fortunately, the Small Business Administration (SBA) has a number of loan programs designed for small businesses, including microloans, the popular SBA 7(a) Loans, the CDC/504 Loan Program, and Disaster Loans.
No. 1: SBA Microloans provide short-term loans of up to $50,000 to small businesses and some not-for-profit organizations.
No. 2: SBA 7(a) Loans go up to $150,000 and are available to establish a new company or to assist in the acquisition, operation, or expansion of an existing business. The 7(a) lending program also has special funding options for companies that export to foreign countries or that operate in rural areas.
No. 3: SBA Express and Pilot Loans are offered to active duty military personnel, veterans, and borrowers from distressed communities.
No. 4: SBA CDC/504 Lending Program is a long-term financing tool designed to encourage economic development within a community. It provides maximum funding up to $1.5M when meeting job creation criteria or a community development goal. CDC/504 funding is used for fixed asset projects, such as purchasing land and/or buildings, making capital improvements, modernizing, renovating or constructing new facilities, or buying long-term machinery and equipment.
No. 5: SBA Disaster Loans are available through the agency's Office of Disaster Assistance (ODA). Through this program the SBA provides low-interest, long-term loans for physical and economic damage caused by a declared disaster.
Small business is America's most powerful engine of opportunity and economic growth. In addition to loan programs, the SBA offers a variety of support services to help entrepreneurs navigate startup issues and find smooth sailing after they have opened for business. The agency's 8(a) Business Development helps small and disadvantaged businesses compete in the marketplace and enables them to gain access to federal and private procurement markets.
Additionally, the SBA offers mentoring, procurement assistance, business counseling, training, financial assistance, surety bonding, and other management and technical assistance for women, minorities, Native Americans and veterans. The agency is a valuable government resource for any small business owner.
This opinion column was written by Rohit Arora, co-founder and CEO of Biz2Credit, an online resource that connects small business owners with 1,100+ lenders, credit rating agencies, and service providers such as CPAs and attorneys via its Internet platform. Since 2007, Biz2Credit has secured more than $600 million in funding for thousands of small businesses across the U.S.