Financing with equity is the number one way used by most entrepreneurs. Also, when your fundraising takes you to other funding sources such as banks, they will want to know how much of your own money you’re contributing. Ideally, you calculate a contribution of 20%.
Start by making an inventory of your assets. Assets include savings accounts, equity in real estate, retirement accounts, vehicles, recreational equipment and collections. You can sell some assets to get cash or use them as collateral for a mortgage loan. If you have investments, you can use as an initial resource. Also check your personal credit lines. Some businesses have successfully started with money from the credit card owners, although this is one of the most expensive ways to finance.
If you’re a homeowner, consider obtaining a home equity loan you’ve already paid. Consider borrowing against the cash value of your life insurance. If you have a retirement plan 401 (k) through your employer and you are starting a part-time business, consider borrowing against the plan. Another option is to use the funds in your individual retirement account (IRA).
The second most common source of financing consists of friends, relatives and associates. Keep in mind that your family members or friends may think they have authority to lend money to meddle and review your business. And if the business fails, the loan can be a problem threatening the relationship. Not everyone has the same risk profile and are willing to lose everything they render. Better to rule out those with conservative profile to preserve the relationship in case things do not go as planned.
Once you determine who will you ask borrow, make sure the person is well informed about what starts showing the business plan. Your goal is to make the other person is on your side and get you excited about the business as you, but without generating false expectations. Explains the business risks, that is, everything that can go wrong. There is no worse mistake that show and hide business potential contingencies.
Once the person accepts, you must report exactly how much money you need, what you will use and how you plan to return. It then presents the legal documents an agreement requiring that the person will invest money in the business. Your contract should specify how the loan is guaranteed (that is, the lender has rights of your property), if unsecured, how will the payments, due dates and interest on the loan. If money is placed as an investment, you should determine whether the business is a partnership or a corporation and exactly what role, if any, will play an investor in the business.
The third most common form of financing is obtaining a loan from a bank or a commercial lender. You do not need to identify the exact type of loan you need before approaching a lender: he or she will help you decide what type of financing is best according to your needs. Some of the most common loans are