Credit Options

Part one: Nontraditional sources of business financing to start or expand your business

If a loan or line of credit from your bank is not an option for your business, the following options could help with money to start a business.

Published: October 21, 2016

The majority of businesses need money to start, operate, and expand. Once you know how much money you'll need, the next step is: Where is it going to come from?

Suppose you don't have enough funding to get your business off the ground, but you've done your homework, and you have a better understanding of the financing that you need.

Where are you going to obtain financing for your project? In part one, we share some of the financing options available to you.

Personal savings

This is one of the first sources of financing that many small business owners use. After you accumulate a sizable saving, you may decide to start your business. Normally, you supplement those savings with another financing source, especially if the savings are paying for personal and business expenses at the same time.

Family and friends

Next, you may go to your family members and friends. If you can do this, I recommend that you prepare a written agreement with all of the conditions and terms for this loan, including the amount, the repayment period, the monthly payment amount, the interest rate, if there is one, and anything else that you consider necessary. Afterward, keep your promise to repay the loan.

Personal credit cards

This is one of the sources of financing most people use when starting up a small business. Credit cards have a lot of risks since they offer short-term financing and are, at times, very expensive. If you're careful about how you handle your credit cards, you might obtain other cards at lower interest rates. But using a credit card without any discipline could lead to serious problems and extremely high interest rates. You have to be cautious and know how to use them to benefit from them.

Selling an existing asset

For example, if you have two cars (assets), you can sell one of them to obtain money to start a business. Vehicles, a house or piece of property, jewelry, and other valuable objects could also be sold. Determine whether you are willing to sacrifice some of your assets for your company, and be sure it's the right decision for your spouse or family.

Options that should be avoided

Some business owners use withheld payroll and sales tax to pay other expenses. This is illegal; the withheld tax does not belong to you. Payroll taxes must be paid to the corresponding offices — immediately. If you do not pay your taxes, you risk the possibility of the state Employment Development Department (EDD) as well as the IRS auditing you.

There are also individuals who lend money, both formally and informally, but most of them are going to charge you an extremely high monthly interest rate. Be wary of this option because all your company's earnings could end up being used to pay the cost of this financing decision.

There are several business financing sources to consider.