The vast majority of new businesses fail because of undercapitalization, according to Stewart Welch, III, a certified financial planner and author. But obtaining the necessary capital is the biggest challenge new ventures face. With 50 percent of small businesses failing within the first year of operation, banks are loath to lend to such start-ups; lenders look for at least two years of profitability before loosening the purse strings.
What are other ways to survive in the meantime? In their book Finding Money: The Small Business Guide to Financing, husband-wife authors Kate Lister and Tom Harnish provide the following suggestions:
- Microloan Programs. Available from the U.S. Small Business Administration, www.sba.gov.
- Credit Card Advances. Can be used for practical purchases such as basic home office equipment. But be careful, warns Welch. "If you're relying mainly on credit cards and cash advances to capitalize your business, ask yourself, 'if I don't have money for equipment, where's the money going to come from to service an 18 percent credit card debt?'"
- Home Equity Loans. They have much lower interest rates than credit cards, but like credit cards, can provide the benefit of consumer protection laws. However, you risk losing your home if you default, so assess this option carefully.
- Loans From Family and Friends. These loans should be handled professionally to safeguard all parties involved. Draw up formal agreements that specify collateral and spell out terms, including interest rate, payment schedule and the lender's recourse in case of default.
Source: Quicken Learning Center, www.quicken.com