Finding money for your business

Rhonda Abrams
USA Today

I give presentations to entrepreneurs all over the country, and I'm always asked the same question: "Where do I get the money to start or grow my business?"

Even if you're starting a business that requires little funding, such as consulting, you'll still need cash to pay your living expenses and personal bills.

Before you start looking for money, figure out how much money you actually need. Don't get into more debt than necessary, but most people underestimate how much it truly costs to start a business.

Start by knowing the difference between the two basic types of financing: debt or equity.

• Debt: You borrow money and must pay it back, usually whether the business does well or not.

• Equity: An investor puts money into your business in return for a share of ownership and future profits. If the company fails, you most likely will not have to pay them back.

There are two other primary sources that don't get as much attention: personal assets and income.

• Personal assets: You use existing personal funds, such as savings, or convert other personal assets (such as your home or retirement account) into money you can use for your business.

• Income: The absolute best way to finance a business is by going out and making sales. Financing from income gives you the most control over your business and the most peace-of-mind. You don't have investors, and you don't have loans. But raising money through income is typically very slow. And it's not an option if you need funds before you can make even your first sale.

Those are the major categories. Let's take a look at some specific sources:

• Investors. People will tell you it's always better to finance a business using "other people's money." Don't believe it. Other people's money comes with a nasty attachment — other people. They'll own a piece of your business and may even control whether you'll be able to continue to operate the business.

• Savings. It's best to start a business with your own money. You don't go into debt, and you don't give up equity. Of course, you're risking your long-term financial security. So this is a more comfortable choice for those who are younger. If your savings are owned jointly with a spouse or partner, be certain to get their acceptance of your plans; it will save a lot of grief later on.

• Second mortgage. You may have built up significant equity in your home, some of which can be turned into cash. Be careful, especially if this is your first business. You want to make sure you'll have a roof over your head.

• Credit cards. Accountants will tell you credit cards are a terrible way to finance a new business; you'll face high interest charges and put your own credit-worthiness at risk. But most people use credit cards for many startup expenses.

• Friends and family. Getting family or friends involved in your business is dangerous, but there are exceptions. If the person truly understands the risk involved, grasps the nature of your business, and is someone with whom you can communicate, the situation may work. Just be sure to draw up the necessary legal paperwork.

• Line of credit. Typically, the first type of outside funding a business will get is a business line of credit. The bank sets a maximum amount of money you can borrow; you use as much or as little of this total amount, giving you a way to help manage cash flow.

• Term loan. For larger expenses, such as buying equipment, vehicles, or property, you'll need a fixed loan that you pay back over a set period of time. You may also be able to get a term loan for business expansion, especially if you have an existing, profitable company.

• Vendor financing. Suppliers have a vested interest in seeing you grow; the more you grow, the more you'll buy from them. Many equipment vendors offer financing; with other suppliers, discuss your growth plans and see if you can negotiate favorable payment terms.

Just remember: finding money takes longer than most people think. So don't wait until you're in dire straits to find cash to keep your business afloat.

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