Tired of the 9-5 grind? Know you have the skills it takes to be your own boss? Have you been dreaming of having your own business?
What kind of business to open can be one of the most important decisions you will make, but choosing how to raise finance for your new business will be just as important as the decision to dabble in entrepreneurship.
They are many, many ways to fund the purchase of a business, even a few ways you may not have considered.
Some new business owners have cash available in savings or securities to fund the purchase of the business, and often make the decision to use their reserve funds without looking at other options available to them.
A Home Equity Line of Credit (HELOC) allows home owners to use the equity in their home to qualify for a sizable line of credit secured against their home. Business owners need to understand that the funds borrowed are subject to a fluctuating interest rate, as well as the possibility that if they are unable to pay back the funds they have borrowed the lender can go after the home to recover their funds.
Most HELOCs have the option of paying interest only for a fixed period, and give the home owner 25 or more years to pay back the loan. Some lenders also offer the option to lock in a fixed rate on the borrowed funds and pay back the Line of Credit the regular monthly payments.
There are small business associations who will extend credit to small business owners. Entrepreneurs usually need about 25% of the price of the business down to borrow the rest of the funds.
Usually the borrower requires an excellent credit history and must prove their ability to repay the loan. Lender often requires some sort of collateral. Typically they have a higher interest rate than the HELOC and have shorter repayment terms, making payments higher during the startup period of the business when cash reserves may be at a minimum.
Unsecured borrowing or, signature loans, make sense for some business owners. While these lenders have higher setup and interest rates, they do not normally require collateral, and are quicker to set up.
Which form of funding is best for you is something every person who wishes to open their own business needs to weigh carefully. Whether you chose to dip into your retirement fund, or emergency savings or take out a loan is an intensely personal decision and should be discussed with your lawyer as well as your accountant before making the final decision.
