Even with all of the bad press about getting money to start or expand a business, there are several reliable options available. These are the four best sources of business financing for 2012.
An entire class of small business financing that is largely overlooked, but is a powerful alternative to commercial bank funding are micro loans. There are literally thousands of micro loan programs across the U.S to finance businesses and they are available everywhere. These programs are not typically advertised and are volunteer driven, but with the influx of new Federal Jobs Act that is finally funneling down to the states, these programs are going to see more activity this year than ever before. Micro loans for businesses come from many sources, with many coming through the state and federal government as a way to stimulate economic development and create jobs.
These programs come from the Small Business Administration (SBA), U.S Department of Agriculture - Rural Development (USDA), Economic Development Administration (EDA) , State & Federal government, economic development agencies, not-for-profits, banks and other groups interested in economic growth through business activity.
Micro loans are typically available up to $150,000 (but some go much higher) and these business loan funds are typically at lower interest rates than bank loans (3-5%) and don't have the same lending requirements that banks have.
A great source for finding these loan programs in your local area is www.businessloanfunds.com.
Given the dismal returns in the stock market in 2011 and not much potential to look for in 2012, people are increasingly shunning the stock market and looking for other places to put their money. Bringing in outside capital brings its own set of challenges, so make sure to manage expectations in the beginning and put agreement on paper, no matter how informal the relationship. Deciding on whether to raise investment or borrow money is the subject of another article, basically equity sales are good because they don't require any repayment (the hope is you will though), and most businesses don't turn a profit for a significant time period, which makes paying back loans extremely difficult. The downside to equity is that it is expensive when you consider selling a part of the company. If you are an established business and have ongoing financing needs, then loans make a lot more sense. Loans are easier to deal with when a company has a financial history to prove reliable repayment and an established company likely has more collateral to secure the loan. Note that most investors are probably not going to be interested in small, home based businesses but are looking for businesses that can quickly scale and can potentially make them a lot of money.
Friends and family typically need fewer assurances than investors because they are investing in you as much as the idea and are usually more patient if the business takes longer than expected to be profitable. Regardless of whether you are borrowing from family and friends instead of asking them to invest, maintain a very businesslike and impersonal relationship. Be aware of the old adage that friends and money sometimes don't mix, which is especially true in business and can strain relationships. Profits rarely come in as you projected and cash flow during the first few years can make it really difficult to pay back on a consistent schedule. To avoid putting strain on the relationship, don't overpromise and draw up a formal agreement.
Outside of friends and family there are people in the community looking for investment possibilities. People such as doctors, dentists, accountants, attorneys and other business people either invest individually or join groups of other investors to make investments in small businesses. Typically investors look to invest in businesses within a certain industry that they know.
Despite the media coverage of big banks failing and not making loans to businesses, the focus of these stories tend to be about the large banks who can't make loans. While not all of the large banks got into trouble making loans, many of the small banks are still healthy and are making loans to businesses. The loan game has changed somewhat with the more strict oversight of banks which has made credit and collateral very important in the loan process, especially with a startup business. Banks are typically looking for people with a credit score in the range of 650 (as a general rule but exceptions exist) and sufficient collateral. In addition the bank has loan guarantees available from SBA and USDA to help make the loan less risky.
Credit cards have become an easier source for businesses to access than in the past which can be useful for smaller business funding amounts. According to SBA estimates, credit cards are used by nearly one-third of start-ups. Using credit cards to finance a business is risky as the money can be more expensive at up to 22 percent. While the introductory rate may be attractive, eventually the rates will rise and a business owner is left with expensive debt.
2012 is a great time to start a business and the rates are really attractive, no matter which route you take. Be sure to prepare a business plan and project the potential for success before getting money for your business.