How to Finance Your New Business

Starting a new business is never easy, and unless you're independently wealthy, you'll need some money from another source to get off the ground.

If you aren't lucky enough to be able to borrow money from family members or friends, you'll need to borrow money from a bank or other lender.

Personal Credit Is Risky

You can finance a business solely using personal credit, at least to some degree. Credit cards, loans, or tapping home equity lines of credit are all possible ways to get the financing you need. However, depending on your credit history, income, and assets, you may not be able to secure this credit. Plus, if your business would happen to fail, you might be risking the loss of substantial personal assets, such as your home, if you use those assets to secure a loan.

Commercial Credit a Better Bet for Most

Another option for financing a business is commercial credit, or business loans, which are quite different from personal credit. Short-term business loans, which you typically must pay back within a year, are a common source of start-up funds or relatively quick cash flow.

You can also seek loans that have one- to three-year repayment timelines. Long-term loans, typically reserved for major capital expenditures and improvements, may be tougher to get in the beginning. A long-term loan, unlike the shorter-term loans, generally is repaid through monthly or quarterly installment payments.

Finally, you might also apply for a line of credit, which gives you the freedom to borrow money when necessary, up to a certain limit, without having to reapply for a loan.

Securing Commercial Credit Is Tougher

When you apply for commercial credit, you'll have to provide your bank or lender with more documentation than personal credit. Your lender will want to look closely at:

• Your business plan
• Justification for the loan and the amount
• The time you will need for repayment
• The method of repayment

Your business plan must describe your business, how you envision it operating, and your qualifications to start such a business. It should also have a detailed budget and any supporting documentation of assets and capital that you already have devoted to your business, as well as a personal financial statement.

Lenders will typically require you to guarantee the loan personally. They may even require you to get a co-signer or a government guarantee, such as through the U.S. Small Business Administration.

Your lender will then decide on your application. However, it is often more difficult to obtain commercial credit than you might think. Since many small businesses fail, lenders can be cautious about granting commercial credit.

If you are denied commercial credit, however, don't be discouraged. The lender must give you the specific reasons for their decision, giving you a chance to reevaluate your plan or seek legal advice.