Learn about your different financing options, including how to get a lender's approval and how to raise private equity. Also, find out how business loans work and what type of financing arrangement makes the most sense for you and your business.
A tighter lending market means you may need to think outside the box to get your hands on business capital. Money from relatives and friends can supplement the business financing you're receiving from other sources -- or even fill a critical gap in starting up your business. There are three main options for raising money from family and friends: gifts, loans, and equity investments.
Lenders are generally cautious in making loans to small businesses because of their high failure rate. As a result, these institutions have developed a lot of knowledge about the success rate of small businesses, and they apply this knowledge when they approve and deny loans. For that reason, it makes sense to study their approach, even though it may seem discouraging at first glance.
A promissory note sets out the repayment terms when you borrow money. If you borrow start-up cash for your business from a commercial lender, the lender will require you to sign a promissory note. You should also use a promissory note when borrowing money from a friend or relative. There are several different ways to structure repayment. Learn about them all so you can choose the one that's right for your business.
Unlike a lender -- who temporarily provides you with money to operate your business -- equity investors actually buy a piece of your business. For better or worse, they become your co-owners and share in the fortunes and misfortunes of your business. Before you undertake such an enterprise, learn about the pros and cons of raising money through equity investors and the different forms this equity investment can take.
To raise money for your new business, you have two options: borrow money or sell part of your venture to an equity investor. Loans are often better for businesses whose cash flow allows for realistic repayment schedules and can't require a pledge of anyone's personal assets. Equity investments are often the best way to finance start-up ventures because of the flexible repayment schedules. Learn about the trade-offs that come with each so you can choose the best method for your business.
Money from relatives and friends can supplement the business financing you're receiving from other sources -- or even fill a critical gap in starting up your business. And, the financing terms for loans or investments from your relatives and friends are often more affordable and flexible than what you would get from a bank or professional investor.