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Tips for Financing Your Small Business

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When financing your small business, you must consider the advantages and disadvantages of every option. This decision will have a big impact on both you and your business. 

Before exploring your options, determine how much you can repay on a loan. Understanding your financial capabilities will help you narrow down the best choice for your business. Even if you can’t afford as much as you initially thought, there are still viable routes to explore. 

Here are practical tips you can use to finance your small business today-

Utilize Your 401(k)

While dipping into your 401(k) to fund your business carries risks, it’s a common approach. 401(k) loans allow you to borrow funds from your retirement account without undergoing a credit check. However, there are IRS rules to follow. This includes a borrowing limit of $50,000 or half of the vested balance, whichever is less. Repayment must be made within five years, and a payment plan will be set up.

Seek Support from Family and Friends

When other options fail, turning to family and friends for assistance can be a reliable way to fund your small business. People close to you often want to see you succeed and may be willing to invest in your business. Treat this loan like any other investment by writing clear terms and parameters to avoid misunderstandings.

Explore Crowdfunding

While individual donations of small amounts may seem insignificant, a successful crowdfunding campaign can accumulate substantial funds. Crowdfunding platforms allow you to share your financial needs with your network, providing an easy way for them to contribute. To run a successful campaign, share your story and demonstrate the thought you’ve put into your business.

Find an Angel Investor

If you’re looking to accelerate your small business’s growth, seek out angel investors who are willing to invest their own money. These investors are typically successful professionals with industry expertise to share. Research investors who specialize in your industry or business model and ensure they’re accredited before making any introductions.

Consider a Business Term Loan

The traditional route for securing capital is heading to a bank for a business term loan. Loan amounts vary depending on the lender, loan type, and borrower. A term loan can be helpful for quickly accessing funds to cover expenses like payroll or rent. Repayment terms usually range from 1 to 5 years, and the loan amount can go up to $500,000. 

Remember, bank loans are more suitable for financing larger, one-time projects. To qualify for a business term loan, you typically need a few years of business history, a good credit score, and profitability. While credit score is important for longer repayment periods, even applicants with less-than-average credit scores have been approved by small banks in recent years.

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