[dropcap]I[/dropcap]f you have a great business idea but lack the financial capital to start it, don’t let that defeat you. There are ways to finance your startup, especially in today’s credit markets. Getting a loan today is not as limited of a proposition as it used to be. In fact, it is rare that you would need to dress up and go to a bank. The internet has broadened the availability of financing and this could be valuable if you need money to get your business off the ground. Here are five types of loans to finance your startup.
If you learn about Airbnb’s history, you will learn that they used their credit cards in the beginning to keep their idea afloat. This is not an ideal method of financing, and it is not the purpose of credit cards, but if you have an idea that you feel must be funded in a hurry and you feel like your options are limited, this can give your business a jolt.
Eventually, the Airbnb founders came into some fortune and then some venture capital, allowing their risky credit card approach to work. Most business don’t have this fortune, however. And if you don’t start profiting quickly, your credit card debt can become a real burden. Credit cards have relatively high rates. Their terms are usually worse than longer term loans because they are unsecured. But, they can be handy in a pinch.
Unsecured Private Loans
The internet has opened up the world to creditors who are not conventional banks or large lenders with huge deposits they use for investing. Smaller, newer, online lenders have carved out a niche using the internet to attract clients and qualify borrowers. These lenders take advantage of low overhead and terms more attractive than credit cards and a process that is less onerous than conventional banking to attract customers.
HELOC stands for Home Equity Line of Credit. This is a secured line of credit, where you use the equity in your home to potentially borrow. The line of credit is different than a cash out refi, where a mortgage is refinance and the equity in the home is taken out in cash. With the HELOC, the money is available, but you don’t need to take it until you need it.
Because it is a secured loan, the terms are better, usually a point over approval rates. Also, you only pay interest in the money you take out. You don’t have to pay interest on the whole amount of available money unless you exhaust the line of credit. This can save you money if you are ramping up a business with the idea that the business will begin to profit.
Small Business Loan
There is an organization called the SBA (Small Business Association) which extends loans to qualified small businesses. These loans are designed to help a business get off their feet. Most businesses that get SBA loans build the repayment schedule into their cost of doing business and after the business is humming along, the cost of the loan should not be felt.
These loans are designed to be easy to get by qualified businesses, but they have a higher threshold to cross than the above loans but have the best terms. If your business can qualify this is a low-cost option.
Venture Capital or Angel Investors
Venture capital is when new or expanding businesses get funded by investor groups who believe in the business. Venture capital usually operates in a way where, instead of paying the money back, the business gives up a piece to the investors. Venture capital comes from groups or businesses. This functions similarly to angel investors. Angel investors are usually individual investors who hope the business succeeds and they can profit from its success.
These can be the least expensive forms of financing or the most expensive depending on the success, failure and terms of the deals. And these forms of financing are only available when investors strongly believe in the business you are starting. If your business is solid, but uninspiring, it will likely not have access to these forms of financing. Both forms operate similarly to publicly held companies where the shareholders represent the venture capitalists or angel investors in a private startup company.
Starting a business can be stressful. There are constant variables that change. Issues arise. Unforeseen problems occur. Money is often in short supply. There are upfront costs and often delays in the flow of revenue. The good news is that there are more and more options to fund the startup of your business. The options are good to have because every situation is different. But the options mean that you want to make an informed choice. It is important that you choose the best path forward for your business and financial situation. Fortunately, there are options.
Ryan Kh is an experienced blogger, digital content, and social marketer. He is founder of Catalyst For Business and contributor to search giants like Yahoo Finance, MSN. He is passionate on covering topics like big data, business intelligence, startups and entrepreneurship. Connect with him on Twitter @ryankhgb.