Obtaining financing for a start-up enterprise is difficult because there is no track record on which the business can be judged. Personal assets are thus the first source of capital that must be considered. A personal stake in the enterprise shows a commitment to the business and provides lenders with a potential source of collateral to secure a loan. Most banks require at least a 30 percent personal equity investment in a start-up business and 10 percent to 30 percent in a more established business. If an owner does not have access to sufficient personal resources to get through the lean times of the start-up phase, it may be wise to re-evaluate the decision of going into business at this time.
Sources of financing using personal assets:
Checking and savings account – good source if available
Credit cards – credit lines can come with a high interest rate
Stocks, bonds, and other investments – may face capital gains tax on the sale of investments that appreciated over the years
Retirement funds such as a 401K – may be a penalty for early withdrawal
Home Equity Loans
A second mortgage can be a source of funding for a small business. The feasibility of this source will vary with the amount of equity that has been built up in the home. It can usually be obtained through a bank, a mortgage company, a finance company specializing in secondary funding, or a savings-and-loan (S&L) association. The monthly payment will be a function of the length of the loan and the interest rate. Additionally, there are usually points or fees and closing costs to be considered when assessing the costs of this mode of financing. The proceeds from the second mortgage can either be used as a source of direct financing or as collateral to secure a credit line.
Family and Friends
Family and friends can provide direct investment funds, loans or serve as guarantors on a bank loan if their credit history and resources are strong. Unlike commercial sources, this group is personally acquainted with the entrepreneur, and though they must still be objective in assessing the proposal, intangibles such as personal character are often given more weight by family and friends than by more traditional sources. If an outright loan is not possible, this group can still provide aid in procuring financing through credit enhancement. Credit enhancements are assets of recognized value that can be borrowed to support a loan or other debt obligation. This technique bolsters the asset base so that additional debt financing can be acquired. This can be accomplished through the pledge of personal assets such as a CD, stocks, or bonds as collateral.