Get an overview on the financial and legal requirements for your retail business.
Different sources of financial support
After completing your business plan, the subsequent task is securing the essential funding for your project. There are several options to consider, each with its own set of pros and cons. It is likely that you will utilize multiple funding sources, such as a bank loan in combination with your personal savings.
Let's explore the different funding alternatives to assist you in determining the most suitable option for your requirements.
Prior to beginning,
It is important to note that this content is for informational purposes only. Securing funding for your business is a substantial financial commitment. The appropriate funding choice will be based on your individual requirements and financial circumstances. We highly recommend seeking advice from a financial advisor or other qualified experts when making financial decisions.
Self-funding is when you use your own savings to start a business, giving you the freedom to make decisions without outside investors' influence. By avoiding borrowing money or only taking a small loan, you decrease the risk of defaulting on loans and accumulating excessive debt. This approach allows you to focus on your business without worrying about interest rates or repayment terms.
Nevertheless, relying solely on your savings may require sacrifices or delays in your plans due to financial limitations. Keep in mind that this could leave you with fewer resources for personal emergencies or other investment opportunities.
Borrowing from friends and family
You might consider turning to your friends and family to borrow the funds to open your store. In many cases, a loved one’s decision to support you financially will be based more on their trust in you than your credit score or five-year financial projections. You might be able to agree on a lower interest rate or repayment period, too, based on this trust.
That said, mixing your business with your relationships can get messy. Communication and formal agreements are important to avoid mismatched expectations and conflict. First, ensure your loved one knows all the risks involved before accepting their money. Maintain a clear boundary between business discussions and personal interactions to prevent misunderstandings.
Then, create a formal agreement. You may wish to go so far as to draft a contract and have it notarized. In the agreement, include how you’ll communicate—especially regarding sharing financial information—and the repayment terms. Be clear about whether this is a loan or an investment—a loan includes repayment and interest, whereas an investment means your loved one will own a share of your business and, therefore, be entitled to profits.
Treat a loan from friends and family with the same seriousness as a loan from a bank or investor. Prioritize the repayment schedule and any other commitments outlined in the agreement.
Small Business Grants
If you are seeking funding, consider exploring the possibility of qualifying for a small business grant provided by the government or various organizations. Grants are typically designed for specific groups, meaning that your business's mission, location, and ownership may make you eligible for some grants while disqualifying you from others. Given the time-consuming nature of grant applications, it is advisable to apply only if you meet the specific criteria for a grant.
Competition for grants can be fierce, so submitting a compelling proposal will enhance your chances of success. Crafting a grant proposal is a specialized skill, so if you have contacts who are experienced grant writers, it would be beneficial to seek their advice. Additionally, there are numerous online resources available to assist you in preparing a proposal.
Visit the U.S. Chamber of Commerce to discover a selection of grants accessible to small businesses.
Small Business Loans
Securing a loan is a popular method for small businesses to secure financing. Whether you approach traditional banks or opt for online lenders, they typically provide knowledgeable professionals to assist you throughout the loan application process. You will receive a clearly outlined repayment plan, and by making timely payments, your business can establish a positive credit history, which will be advantageous for future loan applications.
Various loan alternatives exist, as detailed below. Regardless of the loan type you select, it is essential to inquire about interest rates, charges, and repayment conditions before finalizing any agreements.
Types of loans
Term loan: A term loan involves receiving a lump sum from a lender that you will repay with interest over a specified period. Repayment terms can range from a few months to 10 years. While many term loans come with a fixed interest rate, depending on the lender and loan duration, you might encounter a variable interest rate tied to market fluctuations, along with closing costs and other fees. It is crucial to inquire with your lender about any additional expenses you may face post loan disbursement. Keep in mind that with a term loan, repayment typically begins immediately after receiving the funds, unlike a line of credit—discussed later.
Government-backed loan: Banks and credit unions also offer small business loans backed by the government. The U.S. Small Business Administration (SBA) collaborates with lenders to facilitate loan approvals for small businesses. SBA loans feature competitive rates and may provide ongoing assistance to support your business operations. A prerequisite for these loans is that you must have pursued funding through conventional, non-government-backed loans unsuccessfully. For further details on eligibility criteria, visit the SBA’s website.
Credit
When you use credit to fund your business, you aren’t receiving a lump sum but are provided with a spending limit that you can access so long as you make your repayments on time. Like taking out a loan, you must ask about interest rates, fees, and repayment terms before signing any paperwork.
Types of credit
Two primary types of credit may work for your business: a business line of credit and credit cards. Let’s look at how they both work:
Business line of credit: If you’re approved for a business line of credit, you’ll receive access to a specific credit limit you can draw from as you need, and you’ll pay interest only on what you use. Interest rates can vary based on your credit score and financial history, among other factors. A line of credit may require collateral—called a secured line of credit—such as inventory or property. Secured lines of credit may offer favorable terms such as better interest rates. Ask your lender about the difference between their secured and unsecured options.
Credit cards: You’re likely familiar with how a credit card works: You charge purchases to your card and pay your bill monthly. You'll pay interest if you don’t pay your bill in full each month and carry a balance into the next month. Some credit card companies offer cards tailored for small businesses that may offer rewards such as sign-up bonuses, cash back, and other perks for your business.
What are the main distinctions between a line of credit and a credit card?
When it comes to credit limits, a line of credit from a bank usually offers a higher limit and lower interest rate compared to a credit card.
Regarding collateral, a line of credit may necessitate collateral, known as a secured line of credit, such as inventory or property, which is typically not mandatory for a credit card.
Unlike a credit card, a line of credit does not provide rewards or benefits.
Typically, interest rates are lower with a line of credit than with a credit card.
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