Fueling Up

Explore These Options

Once you've estimated your start-up costs, how will you raise the money you need? Explore these options and decide which are best for you:

Liquid assets. Start with the cash you have in your checking and savings accounts. Look at other assets you could sell, including stocks or bonds, real estate, cars, boats and antiques.

Family and friends. Depending on how deep their pockets are, family members and friends might be willing to invest. The advantages of borrowing from those you know are obvious: You won't have to talk with a loan officer or pay the current interest rate. A possible drawback: If your business falters, your relationship with your family members or friends might also.

Credit cards. In addition to her savings, Mitchell used credit cards to raise the $2,000 she needed to start her business. Credit cards provide instant money, and you can deduct the interest you pay if what you purchase is a business expense. "Be cautious," advises Mitchell. "Easy money is harder to pay back."

Life insurance policy. If you hold a whole life policy with at least three years of maturity, you can likely get a loan against the cash value of your policy. Most insurance companies will lend you up to 90 percent of your policy's cash value at rates generally more attractive than those charged by credit card companies. You are responsible, of course, for keeping up the premium payments on your policy.

Retirement plan. Still working for a firm while starting your small business? Then check into borrowing from your 401(K) plan. While rules vary, you generally can borrow half of what you've put into your retirement plan, up to a maximum of $50,000. There are drawbacks, however. If you quit your job to run your small business full time, you'll probably be required to immediately repay the amount you've borrowed.

Home equity. If you own your own home, you can take out a home-equity line of credit, apply for a second mortgage, or refinance your original mortgage. Generally, you can borrow as much as 80 percent of your home's equity.

Partner. Partners can be a great source of financing for a start-up. You'll gain additional capital and benefit from the skills and experience another individual brings to your business. Conversely, you'll have to share profits, and, if the business relationship doesn't work out, you'll have to terminate your partnership.

SBA-guaranteed bank loan. Depending on your credit record and the strength of your business plan, you might secure a Small Business Administration (SBA)-guaranteed bank loan. Loan interest rates are generally two percent over the prime rate, and you can typically borrow $150,000 to $750,000. The application process can be tedious, the competition intense, and you must first be turned down by a commercial lender before you apply.

Bank loan. While it's difficult for a start-up to secure a conventional bank loan, it's not impossible. "Banks don't make small-business loans, but they do make loans to people who start small businesses," says Bangs. "Get to know your banker. Show him you've done your homework by estimating your costs, developing a financial plan, and being specific about the amount of money you need. Then he'll have reason to invest in you."

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