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What Should I Consider Before Seeking a Business Loan?

Is it better to go to a bank for a loan or ask family and friends? What factors should I consider? Are there better ways for an entrepreneur to finance his or her business today?
Tim Berry answered July 20, 2011
URL: http://www.entrepreneur.com/answer/222343
This is a tough one to answer because so much depends on the specifics of your situation, what resources you have, what level of funding you need, how you feel about business with family and friends, how sophisticated they are, and so forth.

I knew a man who was caught for years in a business he hated because he had taken money from friends and family and he didn't have the heart to tell them he'd failed.

On the other hand, it's against the law for a bank to lend you money just because they like your business plan. You must have assets to put at risk, meaning assets you lose if you don't repay the bank. In some cases the Small Business Administration (SBA) will guarantee up to 70 percent of the loan -- ask about that at your bank, the SBA does it using the banks, not directly with you. But even in those cases you still have to put up 30 percent of the funding yourself.

And if you have an investment-worthy business -- meaning it's run by people with real startup experience -- and are offering a good shot at strong market growth, defensibility and scalability, then you might even be better off sharing your business with investors who will put money into the business in exchange for ownership.

I've written a lot about these options on my blog Planning Startups Stories. Look especially at the categories angel investment, bootstrapping, and business financing.

Related: How Do I Negotiate an Ownership Stake?
Related: Small-Biz Loan Money Finally Trickles to Community Banks
Tim Berry is the chairman of Eugene, Ore.-Palo Alto Software, which produces business-planning software,
He founded Bplans.com and wrote The Plan-As-You-Go Business Plan, published by Entrepreneur Press. Berry is also a co-founder of HavePresence.com, a leader in a local angel-investment group and a judge of international business-plan competitions.