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5 Ways to Finance a Small Business

By Andrew Lu | Last updated on

Great, so you have an amazing idea for a product or service. Now all you need is financing to turn that small business idea into a reality.

The truth is that many million-dollar ideas are buried at the financing phase. The unfortunate reality is that unless you are blessed with considerable wealth, you will have to seek financing for your business, and if you don't get it, your business may never make it off the ground.

There are many different ways to get small business financing, each with its advantages and disadvantages. Here are five popular ways as compiled by Business News Daily.

  1. Small Business Administration (SBA) Loan. There are two general types of SBA loans: a 7(a) guarantee small business loan and the 504 fixed asset small business finance program, reports Business news Daily. These loans are backed by the federal government, so the advantage is that banks may be more willing to make these loans. The disadvantage is that these loans are typically not given to businesses at the startup phase. Instead, banks look for established businesses that have at least two years of cash flow.
  2. Friends and Family. The advantage of getting a loan from friends or family is that you could get a loan at very little, or no, interest rates. However, the obvious downside is that you'll be mixing your business life with your personal life. Many friendships have been shattered when loans went unpaid.
  3. Home Equity Loan. Your most valuable possession is likely your home and you may be able to use your home as collateral in receiving a considerable loan. The obvious downside to a home equity loan is that if your business fails, you could lose your residence.
  4. Credit cards. This is probably the simplest way to borrow money. Just charge everything your business needs to your credit cards. One thing you should consider though before putting everything on plastic is the typically onerous interest rates that credit card companies charge if you don't pay in full.
  5. Venture capitalists. Venture capitalists can be great as they can be a source of large amounts of funds and can even provide expertise to your business. Unfortunately venture capitalists are not cheap -- they'll likely want a significant chunk of your company -- and they're typically only available to certain businesses -- think dot coms and not mom and pops.

Financing your small business can be critical to the success of your small business. But be aware that any time you are asking for money that is not yours, you are opening up a potential can of worms.

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