Examining your financial situation is a crucial step to determining your cash needs for the start up process. You may need a loan for only a portion of the expense requirements; remember that interest on any loans become part of expenses. There are several choices for financing sources, but each carries its own opportunity cost. Obtaining money refers to two separate processes; banks will likely not lend you the entirety of the sum that you will need to start your business. Banks and other financial institutions expect potential business owners to have their own money to put on the line, as well. In fact, lenders usually require that potential business owners put up as much as a third of the start up costs. This means that if you expect to need $100,000, $30,000 of your own money will be expected to be put into the business. If you don’t have that sum there are other sources to look to, in order to raise that money.
Friends and family are the least expensive way to raise funds, mainly because they may not charge you interest, and family and friends usually lack the stringent requirements of financial institutions. There will likely be no need for a business plan, although it would be a nice gesture to present such a document to someone lending you a substantial amount of money. Friends and family are also more likely to fall for pleas of sympathy and clear explanations of need. If you do borrow money from family and friends, treat it as any other loan. Put it in writing and have an expected time for repayment in full. If your friend or family member refuses to charge you interest, set the loan up so that they get that interest back anyway, by using the prime rate as a rule of thumb. This will help to protect both the lender and the borrower. The document should be clear and precise, spelling out exactly what the terms are and under which conditions the money has to be returned. This also proves to keep a record of the extra money being put into your business, which will come in handy when the time comes to sell your business.
Besides seeking funds from friends and family, you can solicit investments from interested strangers, like other successful companies that wish to have an interest in your company. These investors may also bring the same kind of industry experience that a franchiser would bring to the table.
Credit card loans should be a last resort because of the unbelievably high interest rates. The annual interest rate is over 18% per year on most revolving credit cards and there are many other less expensive ways to borrow money with lower interest rates and higher credit limits, and better repayment terms. If this becomes your only choice for outside funding, besides a loan, then re-evaluate your new business idea and look at why no one is willing to lend you money. If you really believe in yourself and the business idea then this is a viable option, but remember to proceed with caution at all steps.
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