How to Get a Loan to Start a Business

Although the bank is usually the first place people think to borrow money from, there are other options. Borrowing money is not as scary as it seems and there are several ways to go about it. Some "other" options are:

Borrowing from family or relatives can be a sticky situation, but if you can get through the fact that you will have to invite them over for dinner a hundred times till you get them paid back, you might just muddle through to the end. It is better to go ahead and have a formal contract with them. You have to realize that using family money shouldn't be treated any differently than the bank. it is important to pay them back on time as well.

Your savings account is another option if you want to get away from heavy interest payments. You could treat your savings account as a loan and also pay it back over time and pay a lighter interest to yourself for the interest you will be losing by drawing out your money. Set up an account where the payment back to your savings account will be drawn out automatically and placed in your savings account, every month.

Borrowing from your 401K is probably the smartest move of all the options because, here again, you will be paying "yourself" back with interest. Plus the fact that you can borrow against your own money without "withdrawel penalties". To just withdraw the money from you 401 could cost too much in penalties, even though the thought of not having to make payments to anyone looks good, but...what if the business goes belly up? It would have been better to keep making payments BACK to your 401K and drawing that interest again. When you make payments back to your 401K, the interest money goes back in, too. You have literally, given yourself a loan and made intersest payments to yourself!

Venture capital is where an investor or a group of investors will loan you money for your business or business idea, but then they become principle partners with you or they assume the role of helping you "run" your business. Venture capitalist usually want a hefty price for letting go of their money. You might not have to pay the money back in a sense of making payments but rather through the profits you will be making AND you have gained a "partner" in the process and one that may not see the "vision" as you do but have a "vision" of their own for the direction your business may head. Be sure you are willing to give up some of the "decision making" before you try a venture capitalist.

Enlisting a financial partner can be a good move if you get a contract up front explaining in detail HOW the partner is to be paid, whether monthly through payments and maybe a small percentage of profit or whether the partner is going to front all of the money for no "payback" payments and instead draw 50% of the profits. However you can agree upon, be sure to GET IT IN WRITING, so that there are no misunderstandings later.