In essence, you have four options available to you for financing a business.  You can:

• Borrow from a friend or family member
• Take out a home equity loan
• Apply for a business loan
• Put the expenses on a credit card

Each of these options has its pros and cons.  Borrowing from a friend or family member, for example, is generally the least costly option because you will likely get a great interest rate.  But, borrowing from someone you know can place stress on a relationship if you do not make your payments in a timely manner.

Taking out a home equity loan can also fetch a low interest rate.  At the same time, you are putting your home up for collateral if you are unable to repay the loan.  A business loan can offer a decent interest rate, but can be difficult to obtain.  You will need to put together a very thorough business plan, which is something you should do anyway, in order to convince the bank that your business is viable.

A business credit card is perhaps the most convenient and least risky method of financing a business.  But, keep in mind that credit cards usually have very high interest rates and it can be easy to find yourself spiraling into uncontrollable debt if you do not keep close tabs on your expenses.

Deciding Which Method of Business Financing is Right for You

When deciding which method of business financing is right for you, you need to first carefully explore the pros and cons of each.  You also need to ask yourself the following questions:

• Will I need to hire employees in order to get my business started?
• If I do need to hire employees, how much will I need to pay them?
• What are the “hidden” costs behind hiring employees, such as insurance?
• What overhead costs will I need to absorb, such as furniture and leases, in order to get my business off the ground?
• What expenses will I need to incur in order to purchase the goods my business will sell or the supplies I need in order to offer the service I will provide?

After determining the costs it will take to get your business started, you can better determine which type of financing will provide you with the amount of money you need at the time when you will need it.  Keep in mind that it is better to get all of your money up front from a lender rather than going back and asking for more later.  With a credit card, on the other hand, you have more flexibility when it comes to when your money can be accessed. 

Deciding to start your own business is an exciting time in your life.  Just be sure to plan it out carefully and to explore all of your options thoroughly in order to give yourself the best chance of success.