It use to be said that owning a home is the American dream. However, many are now saying that owning one’s own business is really the American dream. But finding money to finance a business may be more difficult than finding money to buy a home. Unless you’ve developed a good track record with business credit, many commercial banks and other traditional lenders will be reluctant to extend credit to you.

Where to borrow.

In order to identify an institution most likely to lend to you, you need to identify which phase of development your business is in.

Phase 1, businesses are just starting up.

For this phase, it is suggested that rather than approach a bank, sources of funding may include friends, relatives, adding partners that have the financing, state and local governments offering micro-loans (you must have a very clean credit record), credit unions, local economic development authority (not available in every county), and using any equity you might have in your home. Getting a home improvement loan will be the cheapest source of money available. The most expensive source is using credit cards, but it is being done, and owners are succeeding.

Phase 2, businesses have a business plan and product samples but no revenues.

Many of the sources of Phase 1 would still apply. However in addition to Phase 1 sources, banks can be approached if you have extensive experience in the business you are starting, and are going to invest at least 25% of your own money. For example, if you worked for a business that had a similar product, or at least served the same customers, However you must be careful that you are not a ‘me too’ business and trying to compete against an established business.

Phase 3, business has a complete business plan and have developed potential customers that are ready to buy.

Phase 4, business has been in operation for a period of time, has documented revenues and expenses.

For phase 3 and 4, the business is sufficiently developed to approach a commercial bank or other traditional lenders. The key is in going to a bank where you have already established an account. From the day you open your account, you should be developing a relationship with the lending officer so that you are not a stranger when it comes to borrowing money.

When To Borrow.

1. To purchase current assets such as inventory. Once the inventory is sold, the loan is paid off.
2. To purchase fixed assets such as equipment. This would be paid off over several years. Typically 7 - 10 years for equipment and up to 30 years for a building.
3. If you are in phase 4, it may be time to replace other types of credit such as high interest credit cards, to pay off a relative and friend, or to increase your purchasing power to get better discounts.
4. To buy out a partner.