Starting a business can be a costly and confusing endeavor.
Unless you are independently wealthy or able to borrow money from a close friend or family member, you will need to find other ways to finance your new business.
The most common way of doing this is to borrow money for a bank or other type of lender.
The two options for financing are to use your personal credit or seek commercial credit. While using personal credit may be easier than applying for commercial credit, there are some drawbacks to financing a new business using personal credit.
Personal credit will get you credit cards, personal loans, and lines of credit using home equity.
The amount of credit you will get will depend on credit history, personal income, and your personal assets. One of the major drawbacks of using personal credit to finance a new business is the risk of failure. If your business fails you might loss the personal assets, such as your home, which you used to secure the loan.
Commercial credit, or business loans, is another way to finance your new business.
This option involves providing the lender with much more information than what is needed for personal credit. You will need a business plan, a detailed outline of how much money you will need, the length of time you will need to pay it back, and repayment terms. Your business plan must be thorough and include everything from how you plan on opening your business, your qualifications to run the business, how it will operate, and where the business will be located. You will also want to provide the lender with a budget for your business and include any assets or capital you have already invested or plan to invest in the business.
The four types of commercial credit are short-term business loans, intermediate-term business loans, long-term business loans, and lines of credit.
Short-term business loans typically must be repaid within a year. These types of loans are ideal for start-up costs of a business, such as buying equipment. Intermediate and long-term loans extend for greater than one year and are generally repaid through monthly or quarterly payments. They are ideal for major expenses such as buying property.
The final option is to apply for a line of credit, which will allow you to borrow money only when you need it without the hassle of reapplying for a loan each time.
Once you have applied for personal or commercial credit, the bank will make a decision on your application. Banks and other lenders are usually more hesitant to lend money to new, small businesses because of the high failure rate among these types of companies.
If you are denied personal or commercial credit, review the reason that the bank denied you or your business. Try to alter your request and your business plan to better match what the bank is willing to give you in order to apply for credit later and achieve a better outcome.