Self-financing is the most widely used source of small business capital. Savings, home equity, and/or borrowing against cash-value life insurance can provide the necessary up-front investment. They can also help you acquire equipment and supplies or help pay bills when during periods of slow cash flow.
These sources may be entirely under your control, but they should be used wisely. Make sure you have a realistic plan to meet your existing obligations (e.g., mortgage, utility bills, vehicle payments, insurance, and daily living expenses), and consider “worst-case” scenarios that could overwhelm whatever financial cushion you have left.
If your personal resources don’t go far enough to cover your start-up costs, consider turning to friends and family members. As with any business relationship, it’s essential that contributors clearly understand how the funds are to be used; the repayment terms and amount of interest, if applicable; and what role, if any, they will play in operating the business. A handshake is never enough; put everything in writing and have all parties agree to the terms.
Afterward, keep your investors updated on how your business is progressing. This may make it easier to seek additional financing, or renegotiate your payment terms.
David Solis, National Sales Executive for Bank of America’s Client Development Group, says start-ups should also consider angel investors, affluent individuals who have capital. “Those businesses must consider how much they can give up when it comes to the high rates of return and possibly equity/ownership that angel investors often require,” he says.
Credit cards can also be a source of quick cash for your business, but low limits and high interest rates usually make them useful only as a last resort, or as a short-term cash flow bridge. And while credit cards offer convenience, they are not for every type of purchase. “You would not want to use a credit card, which has to be paid off in a very short period, to purchase a big-ticket item with a long shelf life like a delivery van,” advises Solis.
As such, it’s best to use a credit card only if absolutely necessary, and you have the ability to pay them down quickly. Otherwise, that debt can quickly spiral out of control.
To get an insightful, objective look at your small business financing options, contact Raleigh SCORE. We provide free, confidential business mentoring and training workshops to small business owners. To schedule a free appointment with our experienced counselors, go to http://raleigh.score.org, or call us at 919-856-4739.