Sources for capital many and varied
June 04, 2012
SAN ANGELO, Texas — One of the most important things to consider when starting a small business is raising capital.
Entrepreneurs continue to struggle with a lack of cash. As you have heard many times, cash is king. That is so true, especially these days.
Many potential small business owners have a good idea and business model but have limited or sometimes no cash at all. The majority of these look to traditional financing. Others go to family and friends to help finance their small business.
Business experts suggest using family or friends as a last resort; after all other options have been weighed. There is nontraditional capital available known as crowdfunding. This is Internet based where a small-business owner can obtain small amounts of cash from lots of people. Entrepreneurs typically use a variety of sources to raise capital.
Borrowing from family and friends means you already have an established relationship. They already know and trust you, making them more likely to have faith in your business idea as well. Make sure you have a well-designed business plan in place to support before asking for a loan.
It will be less hassle dealing with someone you know. The business plan will probably be less scrutinized as it would be if you approach a lender. Credit score will not be as big an issue nor collateral be required.
Another big advantage is low or no interest on the loan. The terms of each loan may vary based on the relationship and situation, but it is highly unlikely that someone close to you will demand a high interest rate for a small business loan.
Now borrowing from friends and family can be a tricky proposition. It cannot only complicate personal relationships, but can irreparably damage them. Make sure both parties approach this professionally, with all pitfalls discussed and formal arrangements in place.
With these types of loans, an entrepreneur might get unsolicited advice about your business from family and friends. They may even act as if they are part owners of the business. You may have to remind them the loan has not brought them a stake in your business. However, you must remember if the investment is treated as equity, rather than a loan, they technically do own part of your business.
Consult with an accountant about potential tax implications of the loan before finalizing the loan. If it is a large enough amount, you may be taxed on the amount of interest paid. There could be other issues, so a professional can help guide you and your small business in regard to additional tax liabilities.
The advisers at the Small Business Development Center can assist in business planning and loan proposals. Please give us call or come by our office.
“Business Tips” was written by Paul Howard, Business Development Specialist and Certified Business Adviser IV of Angelo State University’s Small Business Development Center. Contact him at Paul.Howard@angelo.edu.