Sources for Debt Financing
Debt Financing simply means you get a loan from someone or
somewhere and go into debt! You are obligated to repay the
money. We provide some popular sources for debt financing to
consider.
SOURCES FOR DEBT FINANCING
1. YOURSELF! (Savings) You are your own best "lender" if you
have the savings. This approach can be quick and easy. CAUTION:
Ensure you have adequate savings for both the business and other
life contingencies.
2. FRIENDS and RELATIVES. If they believe in you and your idea,
friends and relatives are sometimes willing to fund you. Choose
this route with care and ensure you execute a formal loan
document stating loan terms (interest, terms of repayment).
CAUTION: Many friends have been lost and many relatives
alienated because of a small business failure.
3. BANKS and CREDIT UNIONS. Many banks and credit unions (check
with your own first and with you local chamber of commerce for
alternate possibilities) will loan money for starting a small
business. This approach will require that you present a formal
plan to the bank showing justification for the amount you are
borrowing.
4. THE SMALL BUSINESS ADMINISTRATION (SBA). Check out their
website (http://www.sba.gov). Contrary to what many believe the
SBA does NOT generally loan money directly but rather guarantees
a loan (normally up to 90%). This can make it a lot easier to
obtain a bank loan since the bank's risk is lowered
considerably. The exception is that the SBA does provide direct
loans to certain groups including Vietnam-era and disabled
veterans and handicapped individuals. In general, the SBA will
not offer any assistance until you have been turned down for a
loan by a commercial bank.
Most loans guaranteed through the SBA are between $25,000 and
$750,000. However, there is a "microloan" program for amounts
from a few hundred dollars up to $25,000.
5. VENDOR FINANCING. If your business is one that relies heavily
on certain vendors, it may be possible to obtain financing
through the vendor. After all, they want you to use their
product and therefore have an interest in helping you be
successful.
6. STATE. Some states have small business financing authorities
that issue tax-exempt development bonds that can be used to
finance land, buildings and equipment for manufacturing
businesses. Check with your local government office for details.
7. HOME EQUITY LOAN. Interest rates for this kind of loan are
generally quite low and the interest is fully deductible for the
first $100,000 borrowed.
CAUTION: You are placing your home on the line!
8. LIFE INSURANCE. Some types of life insurance policies (whole
life and universal) have cash value which can be borrowed at
very low interest rates. You are not obligated to pay this money
back but if you don't, your policy payout is reduced by the
amount borrowed.
9. RETIREMENT PLANS. Some retirement plans (401K for example)
allow you to borrow against vested benefits. Generally, up to
50% may be borrowed as long as this is less than $50,000.
CAUTION: If you quit your employment, the loan must be repaid
immediately. If you don't the amount borrowed is treated as an
early distribution and is taxable.
10. GRANTS. Many foundations provide funding in the form of
grants. Check "The Foundation Directory" at your local library
or visit their website at http://fdncenter.org to find out what
foundations may have an interest in your specific business idea.
The Foundation Center may be reached at (212) 620-4230.
11. CREDIT CARDS. These should be used with care because of the
excessively high rates of interest usually charged.
CAUTION. Remember that many of these loan ideas will require you
to sign a personal guarantee. This means that regardless of what
happens to your business, you are personally liable for the
repayment of the loan amount. Think carefully before signing.
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