In your effort to finance your business start up and also to make your business run into the top gear you have the option for going for loans both personal and bank. As these two options provide a wide array of choices for you, it’s important that you have a clear cut understanding of at least many of them.
Personal Loans
- Borrowing from friends and family - After self-financing, the second most popular source for business start-up money is comprised of friends, relatives and business associates. Family and friends are great sources of financing since these people know you have integrity and will grant you a loan based on the strength of your character. People with whom you have close relationships know you're reliable and competent, so there should be no problem in asking for a loan. Keep in mind, however, that asking for financial help isn't quite the same as borrowing the family car. While squeezing money out of family and friends may seem an easy alternative to dealing with uptight bankers, it can actually be a much more delicate situation. Your family members or friends may think lending you money gives them license to meddle. And if the business fails, the issue of paying the money back can be a problem, putting the whole relationship in jeopardy.
Bank and Other Loans
- SBA guaranteed loans – these loans are term loans from a bank or commercial lending institution of up to 10 years, with the Small Business Administration (SBA) guaranteeing as much as 80 percent of the loan principal. The SBA guarantees up to $1 million of loan principal. These are highly appropriate for established small businesses capable of repaying a loan from cash flow, but whose principals may be looking for a longer term to reduce payments or may have inadequate corporate or personal assets to collateralize the loan. Acquiring these loans however maybe challenging. Although the SBA has created streamlined approaches to loan applications, conventional SBA guarantee procedures and protocols pose a significant documentation and administrative challenge for most borrowers.
- Microloans - The Microloan Program was developed by the SBA in 1992 to increase the availability of very small loans to small-business borrowers. It achieved permanent status in 1997. The program uses nonprofit intermediaries to make loans to new and existing borrowers, and since 1992 has accounted for more than 12,500 loans totaling more than $112 million. These funds may be used for working capital, inventory, supplies, furniture, fixtures, machinery and equipment. These loans can be put to best use by startup companies with lower capital requirements and limited operating history. Microloan borrowers may benefit from the intermediary's expertise in business. With regard to the value of loans available, microloans span from less than $100 to a maximum of $35,000. Average loan size is $10,500, with an average loan maturity of 42 months. The maximum term for this type of loan is six years.
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