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Small Business Funding Options

Essay by   •  April 20, 2011  •  1,201 Words (5 Pages)  •  1,389 Views

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There are several advantages to accepting funding from a relative. The first, and most obvious, is that by entering into a partnership to pay back this relative, there is no high rate interest to worry about, as there would be with a bank loan. Also, the relative only has to agree to the assistance, instead of applying for bank approval. There is also no risk of depreciation, as there is with the stock market. However, there is also a very large risk with this type of funding. When using a short or long term loan with a bank, once approval is granted, the funding is guaranteed. When borrowing from a relative, he/she can decide at any time to stop funding for no particular reason.

By loaning us money for our business, my relative is assuming a high risk for herself, with little real basis in the investment. It is a personal favor, and it is completely feasible that she could decide, at any time, to withdraw funding. Therefore, to ease her mind about the risks, my partners and I will offer a deferred payment plan to her from personal equity in the event the business fails. Hopefully, this will ease her mind about the investment and discourage her from withdrawing funds.

In the case of my relative withdrawing funding, however, there are other options for financing my partners and I will consider. A commercial loan is a good option, as this would not require us to turn over equity or company control. However, since the initial cash flow will be limited repaying this debt could prove to be more of a hinder than the initial loan was a help. With no operating history and little to no collateral to secure the loan, this may not even be an option.

Another financing alternative is a home equity loan. These loans offer a lower interest rate than conventional loans and are cost effective. However, by getting a home equity loan, my partners or I would risk losing our home in order to secure the business. This is extremely risky on a more personal level than any other type of loan. While we have complete faith in the success of Baskets 'N Things, the cost of failure with a home equity loan is far higher than simply losing money. It means losing your home, and possibly your family. Therefore, this is not something we would be interested in doing.

Most credit card companies offer a credit card that caters to small businesses. These credit cards usually offer an extremely low introductory rate, or "teaser" rate for the first six to twelve months. By rolling over debt to a new card every time the rate goes up, we could ensure a low rate. However, this proves time consuming and can often be a "black mark" when applying for a business loan in the future. Therefore, a credit card for business purposes only would most likely be useful for the purchase of supplies and inventory, but not for larger purchases. We can also keep the interest rates as low as possible by keeping an excellent payment history, so "card hopping" should not be considered.

Initially, since the cash flow will be limited, we may also look into equipment leasing instead of purchasing. In a more long term sense, this is much more expensive, but since we will most likely prove short of funds in the beginning, it should considered as an option. We could lease many different useful products for our business, such as computers, cash registers, delivery vehicles, copiers, etc. Again, this is a short term solution and should not be considered for more than one year.

The Small Business Administration offers a limited number of grants to small businesses that are either struggling or just beginning. Also, the state of Indiana offers regional and minority grants. This is essentially, "free money" and I believe it would be a mistake to overlook it. However, the competition for these grants is fierce and if we should receive a grant, the terms of use are strictly defined. Despite that however, I believe we should apply for all federal and state grants that we qualify for,

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