STARTING YOUR OWN SMALL BUSINESS: FINANCING A BUSINESS
After choosing the business you want to go into, regardless of the line of business, you need a startup capital in order to keep the business going. Some of the usual startup costs facing budding business owners include equipment, furniture and fixture, manufacturing machinery and equipment, office supplies, supplies/inventory, advertising, business location, licenses and permits, and corporation and legal fees, among others.
The degree to which you want to separate business from personal life also matters on the items you have to purchase for your business. Many individuals will use their personal vehicle, cellular phone, and a room in their house to cut the costs of putting up a business. Separating business assets and liabilities from personal ones is costly, but it offers another layer of protection should the business fail.
In running a business, one must also take into account operating costs one has to pay regularly. Some of these expenditures may be needed even before setting up the business, including employee wages, loan payments, and insurance.
The following are some of the potential money sources:
Personal Savings. Many business owners use their own savings to help pay for startup expenses. One advantage of using personal savings is not gaining any interest expense when using own money in funding business. You need not to pay back creditors, and no one will chase you for money in the event of failure. On the other hand, most individuals have allocated their personal savings for retirement, emergency fund, and the like. Unless you already have enough money, you may want to set aside a portion of your savings every month for business. A novice business owner may also explore his home equity, but it is a huge risk to link the success of a business venture with a place to live.
Business Loans. Basically, loans are either provided by a bank or other financial institution. Banks design business loans to finance several needs: real estate, automobile, equipment, and other needs. Normally, loans are for a short-term (six to seven years), but its duration can vary depending on the type of financing needed. Some loans require collateral in order to obtain it such as vehicle, real estate, or equipment. A loan has an origination fee and interest, and can offer a fixed monthly payment and fixed rate.
Other banks only have loans on large amounts. If you need to borrow less than the minimum amount, other financial institutions may give a more accommodative loan or dip into your finances. You may also want to finance machineries and vehicle through line of credit or conditional sales agreement.
Small Business Administration Loans. For those who do not qualify for a regular business loan, Small Business Administration (SBA) loans are good for you. To secure an SBA loan, a business must be owner-operated; for profit; organized as sole proprietorship, corporation, or professional partnership; and meet the size guidelines determined by the SBA. Since such loans are backed by the government, they are much easier to obtain than conventional ones. It also enables you to make lower payments for a longer time period. Although SBA loans are given through banks, the government serves as the guarantor.
Credit Cards. Sure, credit cards can be used to pay business startup costs. But beware: credit card financing can get you into trouble unless you have a card with the required limit and a low interest rate that will allow you to make regular payments. There are some cases a business owner may get a card with an introductory rate as low as 0%. Just make sure you have a clear plan for repaying the money borrowed before the rates escalate to maximize such advantage.
Business Line of Credit. This type of credit has less qualification requirements than a business loan. Similar to a business credit card, this unsecured loan can be used either to refinance debt, working capital, payroll, or other similar types of expenses. These credits are normally designed as short-term loan, and may charge a variable interest rate and annual fee. Others only offer huge business lines of credit, $25,000 and up.
How much do you need to start a business. The size of capital varies from business to business. There is no such thing as one-size-fits-all method. So it takes a lot of research to determine the cost of each item for starting a business, especially if this will be done the first time. The bottomline is to raise a capital enough to keep the business afloat to generate profit. Every purchase must be directly connected to this goal.
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