As a business owner, you almost certainly have to borrow money at some point. Borrowing money isn't necessarily a sign of failure but rather can be a natural step in growing a business. Capital improvements are necessary to set up your company for future growth. Few businesses have the cash flow to make substantial capital investments simply out of day-to-day sales income.
Credit cards provide you with two avenues through which to borrow money. When you use your credit card to make a purchase, such as an appliance, your signature on the credit card receipt represents an agreement to borrow the amount you spend from the credit card companies and then pay it back according to the terms of your cardholder agreement. In addition, credit card companies offer the option of cash advances, or loans that you can use for expenses such as rent and utilities. Interest rates on most credit cards are high — you should only borrow money on them as a last resort, unless you regularly pay off your balance.
Business Line of Credit
Banks often offer loans to small businesses in the form of credit lines, or a sum of money that's available for you to borrow and then borrow again as you repay it. Interest rates for business lines of credit tend to be lower than interest rates on credit cards but lower than structured bank loans, where you borrow an amount for a specific purpose and the money isn't available to you once you repay it, unless you apply for another loan. The application for a business line of credit is simpler than the application for a structured bank loan.
Small-business owners often finance business activities by borrowing money from friends and family. These loans tend to have lower interest rates than bank loans because the lenders are usually emotionally invested in helping out rather than earning money. To obtain a personal loan, you usually don't have to complete the same degree of rigorous paperwork as that for a conventional bank loan. Although personal loans tend to be informal, it's still wise to put the terms in writing and be clear about expectations and repayment schedules.
Bank Loans and SBA Loans
Banks also offer loans to small businesses either directly or through a loan guarantee program backed by the federal Small Business Administration, or SBA. The application for bank loans and SBA loans tends to be rigorous and involves providing detailed business and personal financial information, as well as extensive information about the project or purchase for which you're borrowing money. Bank and SBA loans usually require collateral — or pledged personal assets such as a house — as a guarantee that you'll repay the sum you borrow.
- SBA: Loan Programs
- Gaebler.com: Entrepreneurs: Raise Money
- Entrepreneur: What the Banker Found
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Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.