3 Ways to Finance Your Small Business

  • April 15th, 2013
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3 Ways to Finance Your Small BusinessBrentt Taylor writes for Mortgage Loan Directories and Information LLC that provides information, tools and up-to-date news about mortgage and financial-related matters. Brentt aims to empower consumers to create smart and better financial decision for themselves and for their families.

Starting your own small business can be quite a daunting task, and financing that operation can be the most stressful part of the process. Undoubtedly, there are several options when it comes to funding your small business; I would recommend three in particular.

Small Business Lending Fund

First there is the Small Business Jobs Act of 2010 (SBJA), which was established by the Treasury Department in order to cultivate a culture of increasing small business loans among banks. A program within the SBJA called the Small Business Lending Fund (SBLF), basically works as a credit loan for a small business. The individual bank participating in the program makes the final determination on whether or not to approve the loan.

Although the SBLF comes as a breath of fresh air in the midst of a dry economy, there are some drawbacks. First, the government’s requirements are so stringent that many banks failed to qualify for the program. Second, out of 7,000 community banks nation-wide, only 933 applied. Small business owners will have a very difficult time qualifying for this type of loan, and that’s if they can find a participating bank.

Home Equity Loan

If the SBLF doesn’t sound appealing, you have a second option. You can attempt to finance your small business with a home equity loan. You have the option of choosing either a closed-end loan, or a line of credit. A closed-end loan is basically refinancing your home and collecting one lump sum from the equity. A line of credit differs in that you draw out money in increments up to a predetermined limit over a certain period of time.

While qualifying for a home equity loan may be easier than qualifying for the SBLF, the process does contain some tax liabilities that you should be aware of. If the loan was approved specifically to finance your business, you may not be able to deduct some of your losses. However, if you receive a home equity loan for personal reasons, and you use the money to finance your business, you may be able to deduct double the amount of losses.

Credit Card

A third option is to finance your small business using credit cards. As with the other two financing options, approval is determined by an individual’s credit history. This process is the simplest of the three options; however, the lender may still require that you provide guarantors (co-signers).

The risk involved in credit card lending is that all guarantors can personally be held liable for any losses the business may incur. If the business fails to make payments, the consequences may be grave to one’s credit score. You and all other guarantors are literally putting your reputations at stake. The easiest option may not be the best option.

I have only highlighted a few of the numerous ways in which a person may fund a small business. Before engaging in any of the aforementioned options, careful research should be conducted. Owning a small business is dream for many people, choose your options wisely, and shoot for the stars!

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Comments

  1. Great post Brentt, thank you for sharing. For all three of these options, however, approval is determined based on creditworthiness. Business owners with poor credit scores should be aware that there are specialty finance companies who will provide short-term loans and merchant cash advances to business owners with less-than-stellar credit so long as they can show a predictable cash flow. Merchant cash advances work best for those who have a high volume of credit card sales since repayment is made through a small, fixed percentage of daily credit sales.