Borrowing Money to Fund Your Online Business

If your goal is to expand your online business -- for example, to become an eBay Power Seller -- keep in mind that you may need extra cash to acquire inventory, lease storage space, or pay for equipment or marketing. Listed below are a few sources and tips to consider when borrowing for your business:  

Don't count on banks.  It's unlikely that a bank will loan money to your online business unless you are willing to secure the loan with real estate, personal property, or other business assets — for example, the inventory of a brick-and-mortar retail shop. Banks and other financial institutions are looking for a guaranteed return on their loans, and eBay businesses are usually considered too speculative. Nevertheless, if your business has been around for several years and has a solid profit and loss statement (and perhaps a brick-and-mortar component) you may be able to convince a loan officer or the SBA to grant a loan.  

Borrowing from family and friends.  If you’re borrowing from people close to you, make sure you sign a promissory note, calculate interest and principal, set up a payment schedule, and most importantly, respect the people loaning you money. If you don’t, you may find yourself embroiled in money disputes over Thanksgiving dinner.  You can easily draft your own promissory note  (calculate interest with  an online loan calculator.)  If you would like to borrow money for your business from people you know, but do not feel comfortable creating the official documents yourself, consider using the services of LendFriend  does not lend money, but helps facilitate loans between other people.

Borrowing with credit cards.  Many people finance their businesses with their credit cards, with all the attendant risks: Credit card interest rates are typically higher than any other type of loan, and extraordinary penalties apply if you exceed a credit limit or make a late payment. If you miss a payment on one card, all of your cards can raise their interest rates. When you take a cash advance on a card, there are more unbearable fees and usually no grace period, which means you pay interest from the day you take the advance, even if you pay off your balance within a month. Obviously, credit cards users can quickly get in over their heads. There are some ways to protect yourself, if you are reconciled to reading some fine print. When  shopping for a card, be wary of teaser rates (low introductory rates that jump after a few months) and check the grace period (the period of time from the end of the billing cycle that you can pay your balance in full without being subjected to an interest charge). Many companies have been shortening their grace periods for purchases from 30 to 20 days. Shop around for perks such as airline miles, travel discounts, or other purchasing credits, but be aware that most cards that offer some type of "bonus" charge an annual fee for the privilege and limit the use of the bonus in some way. Always compare the periodic rate that will be used to calculate the finance charge.

Signature loans.  The term "signature loan" refers to the fact that your signature is all that is needed to make it binding. Typically, these loans offers arrive in the mail from a bank, credit card or other finance company, are based on your credit rating and history, and are in the amount of $5,000 or less.  The terms of signature loans are typically the same as the terms of a cash advance on a credit card — high interest rates on monthly payments along with an assortment of fees. If your credit history is good or you own a home, you can likely borrow a few thousand dollars using a signature loan without pledging collateral. Signature loans can offer an easy way to get some fast cash, but can also be risky if you do not understand the terms of the loan. As with credit cards, read the fine print!

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