This post comes from good friends of mine who recently designed, manufactured, and are now marketing an educational board game that helps children learn to read. In a prior post about how to start a business, they shared their experiences from the early stages of their entrepreneurial adventure to develop Er-u-di-tion, an educational sight words game that jump-starts the road to reading. In this and subsequent posts they will share more experiences and provide some tips and tools to help you bring your idea to fruition.
After the due diligence is done and you have decided to go forward as an entrepreneur it is time to line up the necessary financing. For some, there are a number of options available – for others there are next to none. Depending on your product or service, and a number of other factors, you may qualify for a new business grant or government guaranteed loan.
A variety of private foundations and governmental agencies offer these grants and loans, but finding one that you qualify for may be difficult. In fact, unless your product or service relates to development of a new technology or you are starting a non-profit organization, there is little to no value in looking for a grant from the federal government. State governments, on the other hand, do offer grant money to individuals. Click here for a list of each state’s economic development agency’s web site.
The private foundation avenue is another area that may be worth exploring. We found that Wachovia’s web site is a useful free resource to explore private foundation grants. While the state and private foundation grants are worth looking into, we recommend setting your expectations low. As with other chances of receiving free money, business grants are likely a long shot. We looked into a couple of these options without success.
Small Business Loans
Small business loans, on the other hand, are more readily available and may be a good option for you. These generally take the form of loans made by private institutions that are then guaranteed by the U.S. Small Business Administration (SBA), a federal agency that was established in the 1950s to assist small businesses. Click here to learn more about the SBA and its loan process.
Another less traditional financing avenue is peer to peer lending. We did not pursue this route, but it does offer a reasonable fixed interest rate for up to three years. One p2p lending option is LendingClub. To qualify, you must have a credit score of at least 660. The interest rate is based on several factors, including your credit score, loan amount, and amount of outstanding debt. One of the best benefits of peer to peer lending is that the interest rate is fixed (which provides security against interest rate increases) and amortized over three years (which forces you to discipline your spending)
Home Equity Line of Credit
If you need to obtain traditional financing and own your home, the best option is likely a home equity line. These loans usually offer relatively low interest rates and tax deductions. Despite the recent credit crisis we obtained, through our credit union, a $50,000 home equity line of credit with an APR below prime. If you do not own a home, discuss your options with at least three financial institutions. If you are a member of a credit union, or know of one that you could join, this could be your best option since credit unions are non-profit organizations.
The many rewards offered by credit cards make them a viable option for funding a new small business. We used a business credit card to fund various start up costs, but we made sure to pick the right kind of card. We chose a card that offered an initial cash back and future cash rebates when we make business purchases from office supply stores and other retailers. Another option is to pick a card with a 0% APR introductory offer on purchases. There are many credit cards that have no interest for 12 months that are worth considering.
One note of caution. With revolving credit, some can be tempted to spend more than they should. Particularly with credit cards, it is important to make sure you can discipline yourself to spend only for what your business really needs.
Regardless of the method used to finance your start-up business, consider using credit cards to purchase needed goods and services. As long as you pay off your monthly balance to avoid interest charges, there are substantial benefits to using credit cards. They provide up to a 30 day interest free float – this is of particular value if you are paying interest on borrowed money to fund your operations. Credit cards also provide cash back or valuable rewards.