Banks offer loans to start-up businesses that meet their criteria. To qualify for a business loan, you must demonstrate that you will be able to repay the money by providing a solid business plan, as well as showing that you have sufficient resources to guarantee the loan in the form of collateral. The Small Business Administration has a program guaranteeing bank loans to small companies, including start-ups. These SBA loans have the same criteria as bank loans, though their interest rates may be lower.
Credit cards are another common source of start-up business funding. They provide funding by loaning you money to cover business purchases that you charge, as well as cash advances to cover day-to-day expenses, such as rent. Business credit cards tend to have high interest rates but are relatively easy to get, usually requiring that you provide only the information the bank needs to check your credit history. Business credit cards generally do not require you to provide a source of collateral.
Many startup entrepreneurs use personal funds to start companies. Using personal funds offers the advantage of not having to convince anyone except yourself that you are worth the risk. You also avoid costly interest payments. However, if you use personal funds for a business start-up, you run the risk of losing the money and leaving yourself with no financial cushion. It is best to use personal funds as part of a broader start-up business financing strategy rather than as your only source of funding.
It is common for start-up entrepreneurs to borrow money from friends or family to start their companies. Although you must convince even a lender who cares about you that you are a good financial risk, his decision will likely be based more on his ongoing relationship with you than on financial statements you provide. Personal loans offer the advantage of reasonable interest rates and payment terms, but they pose the risk of compromising personal relationships if you are unable to repay.