How to Finance a New Business

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By: LawInfo

Published: 03/2009

Starting a new business is never easy, and, unless you’re independently wealthy, you’ll need some money to get started. If you aren’t lucky enough to be able to borrow money from family members or friends to start your new business, you’ll need to borrow money from a bank or other lender.

You can finance a business solely using your personal credit, at least to some degree. Credit cards, personal loans, and home equity lines of credit are all ways that you might get money to start a new business. However, depending on your credit history, personal income, and assets, your ability to obtain personal credit may be limited. Plus, if your business would happen to fail, you might be risking the loss of substantial personal assets, such as your home, if you use those assets to secure a loan.

The other option for financing a business start-up is to seek commercial credit, or business loans, which differs greatly from personal credit. Short-term business loans, which typically must be paid back within a year, are a common source of initial funds as you begin to get your business established, or when you need relatively quick cash flow. You can also apply for intermediate-term loans, which usually extend from one to three years, and long-term loans, which are reserved for major capital expenditures and improvements. A long-term loan, unlike the shorter-term loans, generally is repaid through monthly or quarterly installment payments. Finally, you might also apply for a line of credit, which gives you the freedom to borrow money only when you need it, up to a certain credit limit, without having to reapply for a loan.

When you apply for commercial credit, you’ll have to provide the bank or lender with more documentation than you would if you were simply applying for personal credit. In particular, you need to have spent some time developing a very specific business plan, which will show the reason that you need the loan, how much you will need, how long you will need to pay it back, and how you will repay it. In your business plan, you must describe your business, how you envision it operating, and your qualifications to start such a business. You also should have formulated a detailed budget and any supporting documentation of assets and capital that you already have devoted to your business, as well as a personal financial statement. Typically, the bank or lender will require that you personally guarantee the loan, and may even require that you obtain a co-signer or a government guarantee, such as is available through the U.S. Small Business Administration.

Once you have applied for commercial credit, the bank and/or lender has 30 days in which to make a decision on your application. However, it is often more difficult to obtain commercial credit than you might think. Since many small businesses ultimately fail, banks and/or lenders may be cautious about extending commercial credit. If you are denied commercial credit, however, don’t be discouraged. The bank or lender must give you the specific reasons that you were denied credit, so that you can perhaps reevaluate your business plan and later reapply for credit.