The road to starting a successful business can be a long one, filled with many hurdles and obstacles along the way. And perhaps there is no part of that journey more challenging than finding the right way to fund your business. While the process may sound daunting, there is a light at the end of the tunnel for future business owners, who now have a multitude of ways to finance their business. Here's an overview of some of the traditional and creative financing options available to those thinking of starting their own business.
Small Business Administration loan
The Small Business Administration (SBA) was started in 1953 to encourage aspiring entrepreneurs to start their own businesses. Under the SBA, there are two types of loans that can help prospective borrowers get the capital they need to start their business: a 7(a) guarantee small business loan and the 504 fixed-asset small business finance program.
The 7(a) guarantee loans for small businesses are more common for small businesses. Prospective borrowers can apply for these loans at banks that participate in the SBA loan process.
"Both programs look for businesses not in the startup phase," said Chuck Evans, co-founder of Prudent Lenders LLC. "They look for businesses two years into the business cycle that are generating cash flow."
These loans have a number of advantages for small businesses.
"The advantage to the borrower is, they have more access to capital," said Evans of the 7(a) guarantee loan. "When borrowing with a loan, collateral or purpose often dictates the terms. If you look at real estate, you are looking at a 20- to 25-year term. If you are financing equipment, you look at the useful life and may finance it for five years. With a guarantee from the SBA, banks can go up to 10 years for working capital, 10 years for equipment and 25 years for real estate. It gives the borrower longer terms and improved cash flow."