What is the Cheapest Way to Finance a Small Business?
Small business owners always have struggled to secure financing, especially when they are in the launch phase. Even when banks charge reasonable interest, wait times and paperwork requirements are daunting. And some financing companies prey on small business owners, hiding fees and higher interest rates in fine print. There are several ways, however, to obtain the funding you need to start your dream without losing your shirt in the process.
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Instructions
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Use collateral, such as a house, car or boat, to obtain a loan from a reputable lender. As the loan is secured, you should be able to ask for, and receive, a much better interest rate than someone seeking an unsecured loan.
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Finance the business with your personal savings, which probably are earning less interest than a loan will end up costing you.
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Borrow money from family or friends rather than a bank. You can even offer to put up an item for collateral to make the arrangement more attractive to them. This route can give you better terms and a better interest rate than a traditional lender would provide.
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Charge the money on a low-interest credit card, if you have one. Depending on the amount of money needed, you might be profitable enough to pay the money back before any interest is charged. Or the interest may be much lower than a bank would offer for standard financing.
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Sell off assets to raise the funds yourself, interest-free. This could mean selling another business, a rental property, a vacation home, an extra vehicle or smaller valuables such as jewelry.
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Apply for a loan through the U.S. Small Business Administration. You may need to provide a lot of documentation and wait a bit longer for funding, but the interest rates and repayment terms are often worth it.
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Tips & Warnings
Using nontraditional sources for money also saves you time in filling out paperwork and proving why you need the money and how you will repay it.
Even if you use an alternate means to finance your small business, it would be wise to have a business plan in place to make sure you will be successful.
When using personal savings to finance a business, make sure to leave plenty of money in reserve for cash-strapped times or emergencies.
When borrowing money from family or friends, always draw up a promissory note for all parties to sign. The note should spell out the rate of interest, terms of repayment, any collateral and any other loan conditions and will help avoid hard feelings or misunderstandings if problems develop later.
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