Choosing a Financing Option When Borrowing Money For Your Small Business

After you have made the final decision to move forward with your plans to begin a small beading business, the next step is to start working on your finances. Determining how you fund your business and what resources are available to you will be crucial to the initial success of your company.Many budding entrepreneurs opt to borrow money when starting out, according to the U.S. Small Business Association. Banks and lending companies may be eager to offer you loans, but it's best to do your research and understand your options prior to making any agreements. Signing off on a loan that you will not be able to repay may not only sink your small business, but will impact your personal finances as well.

The first type of financing available to entrepreneurs is equity financing. This involves raising money for a company in exchange for part-ownership of the business. The ownership is represented through stocks or the permission to convert ownership into stock, according to the SBA.

Many entrepreneurs go with this method of financing because it prevents them from accruing debt. By choosing equity financing, small business owners can obtain funds without having to repay the money in an allotted amount of time. Equity typically comes from people that the small business owner knows: friends, family and other loved ones who have an interest in investing in the company.

Venture capitalists are another source of equity. These individuals are defined as people who have an ample amount of wealth to risk in a new company by placing an investment. Major financial institutions and government-assisted resources are commonly referred to as venture capitalists.

There are numerous types of financing options.

The temptation to choose equity financing in an effort to gain the attention of venture capitalists often pushes many entrepreneurs to go with this option. However, new small business owners should be aware that venture capitalists typically prefer companies that have been in business for approximately three to five years. While they may be risk takers, they still like to see promise in budding companies.

Debt financing is the second option that many amateur small business owners choose when first starting out. This method involves borrowing money from a financial institution and agreeing to pay it back over a defined period of time. A short-term loan requires borrowers to repay the money within one year, while a long-term loan gives individuals the option to pay back the cash in more than one year.

Banks and credit unions are the most common sources of debt financing options. Many of these facilities also offer SBA-guaranteed loans to individuals who are finding trouble borrowing with their current financial situation.

Unlike equity financing, the lender does not receive a portion of the company. Instead, they add interest to the borrowed loan and make money if the individual fails to repay it in a timely manner. Most lenders require borrowers to secure their loan with a portion of the company's assets. This tactic is used to make sure individuals stay motivated to repay the money in a reasonable amount of time.

Regardless of which financing option you choose, you will need good credit in order to obtain approval from a lender or investor. A credit score is an indicator of your ability to repay borrowed money in a certain amount of time. If your credit has been damaged due to late bills, foreclosure or bankruptcy, you may find difficulty taking out money for your small business.

Each person is entitled to a credit report from each of the three national credit bureaus every year. TransUnion, Equifax and Experian. This can help you determine your credit score and keep track of your finances as you begin to embark on a career in entrepreneurship.

To avoid any mishaps along the way, monitor your credit between three and six months before applying for a large loan. A lender will most likely look back on your credit history to determine your ability to repay money over the long-term. One or two late bills can be the difference between receiving approval for a loan and facing denial from a lender.

You can also make an effort to improve your credit score prior to applying for a loan and beginning your small business. It can be tough to come back from a large deduction, such as one resulting from foreclosure, but you can do so over time by staying on top of your bills. Don't let credit card or previous loan debt pile up and tarnish your existing score. Keeping track of your finances can help you when it comes to obtaining funds for your business and in your personal life as well. Getting into the habit of monitoring your finances can help your personal bank account stay afloat and your small business succeed!