Small Businesses are often overwhelmed when it comes to the possibility of funding to support their business. They will often hear of grants that are available, stimulus money, guaranteed loans for small business, loans for credit cards, and even investors willing to give out money for great ideas.
As in all things, it is imperative for businesses to weigh the costs of these options against the obvious benefits. Often a business owner will in a "hands tied" position and feel that anything they must do to obtain the much needed capital. In several months, they may regret that decision immensely.
Grants are available from federal and state sources and often only open to a very narrow band of applicants. If you do fit the criteria, be aware that your competition for free money will be fierce. Be sure that you have well prepared, thorough, and professional looking documents to submit as part of your proposal. Depending on the grant, you may also consider hiring a professional grant writer to make your proposal have the best chance possible. The wait time is substantial and often will require additional funding in the interim.
Stimulus money only applies to a very specific group of opportunities and must be applied for specifically according to the directions. Many funds are regionally based and specific to a certain industry. Make sure your opportunity is a perfect match before wasting your time on applying for it.
Guaranteed loans from the Small Business Administration are rapidly disappearing. It used to be that you took a private business loan from a bank and the SBA guaranteed it.This meant that if you defaulted on your loan, the SBA would pay your bank the money. This reduced the risk to the bank and made it more likely that they would lend to a small business. Now, guarantee rates often hover around 50% and make the risk of loaning to small business quite high. Most banks are not interested in loaning to small businesses because of the default risk. You may find programs, especially if you are a returning Vet or a spouse of one.
Taking a loan from a credit card to expand your business is similar to taking a line of credit on your home. Both have risks and both have benefits. A loan from a credit card carries a very high and often variably interest rate. If your business fails, it will take your personal credit rating with it. However, credit cards are often the most reasonable access to credit that small businesses have. Using the equity in your home to draw cash is a riskier proposition. Instead of risking your credit, you're risking your home. If you can't pay the additional loan if your business fails, you risk losing your home in addition to ruining your credit. Borrow wisely.
When considering an investor, be sure to understand their motives. No investor is in business because they believe in you. The may invest because they think you have a good idea but they are all in it to make money. The way an investor makes money is to tie a string to your business, whether it be equity or a position within the company, to make sure their money is protected. You may find yourself being told by an investor how to manage your business, negotitate contracts or even operate from day to day. Investors gain a great deal of control in your business and some owners have even found themselves no longer running their own business thanks to an investor who edges them out.
This isn't to say that there are no ways out when a small business needs money. These are merely signs to look for when considering borrowing money to keep your business afloat. If the money you borrow is merely to smooth over a rough patch, it's likely a good time to do it if you're sure that patch will end. If your business is floundering and you need to borrow money to make ends meet hoping that business will pick up again, it may be time to re-evaluate your business and make more fundamental changes. Throwing cash at a problem doesn't make it go away, it just keeps it quiet until later.
Take a few moments and analyze your business needs. Are there things you can do to run your business smarter and more efficiently? Can you negotiate better terms with your creditors? How can you avoid the need of that additional capital? Streamline your business now and save when it comes time to pay back the debt later.
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- Jeannie Nash