10 Resources You Haven't Thought of to Finance Your New Business

Navigating the world of finance doesn’t have to be tough. We talked money with the experts and culled their best tips on how to get the most funding for your new business enterprise.
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Before You Start Looking

The traditional resources used to finance a business enterprise-home equity, lines of credit, large banks-are rather dry these days because of the economy. "It’s clear as day that banks are not lending money. They’re undercapitalized," says Barry Sloane, CEO and co-founder of New Tech Business Services. So what’s a business to do? Taking the time to analyze what type of financing you need, and what is available to you is a great place to start. There aren’t any free rides, there are only better choices right now, he says.
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Questions You Should Ask

Of course you want to do everything you can to keep your business alive, but where should you even start? Deciding if you’re willing to give up equity in order to grow is one of the biggest challenges, says Allison Finkelstein, senior director of funds management at TechColumbus. "Do you want to grow your business with a lot of external funding, realizing you aren’t 100 percent owner? Or are you happy going on a slower growth path through things like bootstrapping?" she says. Once you’ve determined your answer, the funding search is officially on.
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Credit Unions

One nice thing about credit unions is that they are owned by their members. That means that these non-profit cooperatives are not worried about the value of their stock-they’re more concerned with customer service."Their rates on credit cards can be more attractive and their late fees tend to be less," says Jennifer Openshaw, chief consumer advisor for the Lending Club. "The downside is that you have to qualify to become a member of a credit union." Previously, many credit unions didn’t give out small business loans. Now, however, many of them have embraced commercial lending for small businesses, Sloane says.
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Small Business Administration Loans

"If you can get an SBA (Small Business Administration) loan today, I strongly suggest a small business owner take it," Sloane says. The U.S. Small Business Administration doesn’t make the loan itself, but it does guarantee loans made to businesses through commercial lending and private institutions. To apply, you need to complete a Central Contractor Registration, have a license, a bank account open with your business, a tax ID number and a North American Industry Classification code that determines your industry. Although there are millions of small businesses, less than 600,000 firms are registered in CCR, says Lourdes Martin-Rosa, American Express OPEN’s advisor in government contracting.
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Community Banks

Community banks are relationship focused and tend to be more responsive when a customer needs something, Openshaw says. Because decisions are made at the local level, it’s easier to get a faster decision or a higher rate on a certain savings account. "They can customize your plan to fit your needs, but make sure they’re FDIC insured," she says.
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Credit Cards

Just say no, seriously. "You’re really tapping your emergency source of funds, and as a business owner you never want to be desperate with nowhere to go," Sloane says. On average, credit cards have a 17 percent interest rate. Not only can you easily rack up debt, but you could also inadvertently mess up your chances to receive further funding down the line. Businesses that stay around are the ones that can typically weather the unexpected storms, Sloane says.
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Friends & Family

Going this route can be a little tricky. Of course they will likely give you the most favorable terms, but is it worth possibly igniting a family feud? "I think you have to be extremely careful and treat the loan like a business deal," Openshaw says. Document the loan; make a record of the interest rate, when you’re going to pay it back, how you’re going to pay it back and what the purposes are. "If for some reason you’re not able to pay back your family member, think of the consequences of that," she says.
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Borrowing Against Your 401K

"I think this is one of the poor choices," Sloane says. "The worst thing one can do is borrow money out of a retirement account and then not only could you possibly blow the money, but you have to pay the taxes." Borrowing from your 401K is like taking a loan out. Most often, the time period to repay the loan is five years. If you don’t, you’re going to be hit with a 10 percent penalty as well as income taxes. "Make sure you have the money set aside," he says. "Uncle Sam is not forgiving like your uncle John." Not to mention if you take a big lump sum out, you will have less in your account to sit and accrue interest. You might as well say goodbye to your nest egg.
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Peer-to-Peer Lending

New alternatives like peer-to-peer lending allow entrepreneurs to fund their businesses rather quickly at competitive rates by matching them with solid investors. Web sites like peer-lend.com and prosper.com make it easy to find an investor while you’re sitting at home. The Lending Club takes it one step further by matching one person to multiple investors, lowering the risk for everyone involved. "Your interest rate at lending club is based on things like your credit score and how long the loan is being taken out for," Openshaw says. "It’s very transparent. There are lots of great stories of people being turned down by traditional banks and then finding success by using the Lending Club."
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Angel Investors

An angel investor is someone who sees potential in your business and would like to provide the financial backing, knowledge and expertise you need to grow and thrive. Be prepared, however, that with the money comes a major downside-dilution of your ownership. Many states have extensive angel networks that can easily be found by doing a Google search. Once you set up a meeting, an angel is going to want to see an executive summary that describes your business, you’ll have to pay a few hundred dollars to make your pitch and then hopefully you’ll be in, Finkelstein says.
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First Published Wed, 2010-08-11 07:48

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