Of the 565,000 new business started in the US each month, by far the largest source of funding is through personal savings and credit (bootstrapping), followed by friends and family.
While it can be great if you have friends or famly who can provide funding, beware that this can be a precarious situation. You're immediately mixing business and friendship/family, which can be a powder keg.
To minimize the risk of your friends or family feeling like you've ripped them off:
- make sure to fully describe the risk to them - repeatedly.
- don't accept funds from someone who can't afford to lose them, even if they insist they can.
- put your agreement in writing and adhere to it as you would to any other lender.
Peer-to-peer lending is an alternative to friends and family, but still avoids having to go to a bank or traditional lender. Through peer-to-peer lending, people can borrow or lend money directly to each other. The largest peer-to-peer lending sites are currently Prosper.com and LendingClub.com.
Crowdfunding is another alternative source of funding. Sites like Kickstarter and Indiegogo give business owners a way to raise funds in small chunks from many people. Depending on the site, the funds may be advance orders of goods, donations, or investments; each site targets a different type of borrower and structures deals differently.
Bank loans will usually require personal guarantee of payback as well as collateral; these loans can be for all types of needs and usually can be repaid early without penalty.
SBA 7(a) loans are made by banks but a certain percentage is guaranteed by the Small Business Administration. As with other loans, rates will vary and you should shop around.
A Line of Credit provides access to up to a certain amount of money and you only draw this money as you need it; the money is a great tool for managing cashflow, especially due to natural fluctations in your business cycle. The draw is often made in the form of overdraft protection, and you only pay interest on the loan amount outstanding.
Take advantage of resources offered by Longwood Small Business Development Center to get more information about topics like various types of funding, tips for success in obtaining capital, and what to do and know before applying for a loan.