Financing the Small Business Start-Up – The Number One Way to Finance Your First Business

Of all the things you will have to take care of when starting your first small business (defined here as sales between $100k and $1 million in the first year) you’re going to need start-up capital. You’ll use this capital to help you with initial costs and cash flow until your business becomes profitable. Following are a few options you may have already considered:

  1. A few searches on the internet will tell you Venture Capital Firms, Angel Investors, or Private Equity Firms are a great place to start. While this might be a great option for some, these types of firms are looking for the next sensation that will generate millions of dollars in a short amount of time. Not only that, you will have to give up ownership of your business and most times you will set a sale date before you even open the doors.
  2. Another option you might consider is using your entire savings account, combined with a loan from your 401K, combined with 2-3 credit cards. While this option is attractive because you won’t need approval from anybody to do it, if you end up needing more money you can get into trouble quickly. I would only recommend 100% financing your start-up by yourself if you ‘ll have more than 6 months of expenses in addition to your start-up capital, or a significant other has a job which covers all of your personal costs.
  3. Ask your Mom, Dad, In-Laws, your rich Uncle Henry some cash. This can be a great option because they’ll be more than likely to give you favorable loan terms and will be more willing to work with you if things get tight, well….maybe. The downside to this option is that your “borrowing money from your family” which means you’ve just added a layer of potential family problems. This can lead to an awful lot of stress on you so I highly recommend thinking it through if you decide to pursue this option.
  4. Finally, borrow from thousands of people. That’s right, but you might know this method better as “getting a loan from a bank”. But, “Banks aren’t lending anymore” is what anyone you ask will tell you. This simply isn’t true, Banks are still willing to lend money to business start-ups with the assistance of the Small Business Administration’s (SBA) 7(a) loan program.

The SBA 7(a) loan program is a government sponsored program which allows first time business owners the ability to borrow money from a bank to start a business. Here is how it works: As long as a bank follows certain guidelines, it can provide you with financing and the SBA will guarantee a large portion of the loan. The guarantee means that if the loan goes bad, the SBA will write a check to the bank for the guaranteed portion of the loan. This greatly reduces risk in the loan for the bank creating the opportunity for you to borrow money to start your first business.

Here are a just a few of the benefits that make this the number one option for financing a brand new small business:

  • Bank financing is one of the cheapest forms of financing available.
  • You won’t see your banker at family dinners.
  • While banks decide whether or not they’re going to lend you money in the beginning, they won’t tell you how to run your business or force you to sell at a pre-determined date.

This is the short and sweet explanation of why SBA 7(a) loans are the best form of start-up financing for small businesses. If you would like find out more information on how to get approved for a 7(a) loan please visit Best of luck to you in starting your business.