You’re starting a new business, which by its very nature is high risk. Of course you want to keep the risk as low as possible. I refer to a business plan here, and you can read about writing that in my previous post “The Business Plan”. In this article I discuss basic topics to keep risks low that I think are important.
Line of Credit or Loan?
|Both options require you to be credit-worthy. If you know you have a poor credit history, take care of that first. Both options will charge interest. Shop around to find the best rate.
Loan – disbursed as a lump sum which you pay back in fixed monthly amounts; applicable to amounts that are known and well defined; you owe the entire amount; defined period in which to pay back
Line of Credit – may require collateral; upper limit given which you draw upon as you need it; if you’re not certain what your expenses will be, this is a better option than a loan; if you don’t draw out the entire amount, it is returned to the bank and you owe only what you’ve taken out (similar to a credit card); depending on the terms you’ve agreed to, the line of credit could be open indefinitely
The risk here is if you can’t sell your product, you now have a loan to pay off and no income with which to pay it. The advantages are reduced hours at your day job and more time to make your product and funds to buy your supplies. My personal choice, because I am highly risk averse, was no loan. Everything has consequences, and no loan means saving money. Take your time and save up money. You’ve waited this long, you can wait until you’ve reached the goal in your business plan. If you can do that, great! If not, the amount you need should be calculated and put into your business plan. A nice balance is to save part of the amount you need and find funding for the remainder. There are alternatives to loans and this is what I mean by “don’t take out a loan”. See the list below.
- DO NOT USE A CREDIT CARD as the source of your start-up funds
- Obvious? Not to everyone, some have tried to start their business this way
- You can certainly use it to buy supplies and pay it off immediately with your start-up funds
- If you do go for a loan, find the lowest percentage rate (I hope that’s obvious!)
- You may be able to get a lower rate if you take a loan with a bank with which you already have accounts
- Small Business Association (SBA) loan program
- Veteran, military personnel, or the spouse of one of these
- Entrepreneur training
- VA Small Business Loans: Here’s Where to Find Them
- Military Personnel and Veteran-owned Small Business Loan Program (MPVSBLP) from the Maryland Department of Commerce
- VAMBOA, Veteran and Military Business Owners Association, is a non-profit business trade association that promotes and assists Veteran Business Owners, Service Disabled Veteran Owned Businesses (SDVOB) and Military Business Owners.
- Women and minorities
- Eleven Grants for Women Owned Businesses That You Need to Know About from Entrepreneur.com
- My county has a Business Women’s Network, so maybe your community has something similar
- Maryland allocated more than $11 million for small business loans in 2015
- Small, Minority and Women-Owned Business funding from the State of Maryland
- Make Google do something useful and search for funding for women-owned and minority-owned small businesses
- Check at the state level for loans and grants, usually at your department of commerce
- Look for grants at the federal level at Grants.gov and these other funding resources
- Use your friends’ and relatives’ expertise wisely
- NEVER ask family for money; it never ends well
- However, these people all have excellent skills and some amazing experience, USE IT!
small business start-ups (and me!).