Written by GuestOur goal here at BestCompany.com is to provide you with the honest, reliable information you need to find companies you can trust.
Guest Post by Susan Guillory
The idea of becoming mired in debt before you’ve even started your first business might seem like a bad idea, but getting financing before you launch your startup can help you succeed even faster than if you bootstrapped it.
The key is being smart about your debt, choosing the right financing option, and having a plan for repaying the loan.
Tip 1: Know how much you need
If you’ve created a business budget, you know what it will cost you to both launch your business and maintain it over time. And while some expenses — like a foosball table for the break room — are nice-to-haves once your business starts raking in the dough, other expenses you shouldn’t put off, like brand new computers and professional website design.
Once you’ve boiled down your budget to the bare minimum you need (don’t forget to include your salary for at least six months!), consider whether you have any existing funds to contribute to the business.
Think carefully before you decide to borrow from your retirement accounts to fund your business; the last thing you want to do is jeopardize your future should the business not work out and you are unable to pay back the retirement funds.
Whatever you don’t have the capital to cover, that’s what you’ll want to seek funding for.
Tip 2: Look at your financing options
You have a variety of financing options, all with different benefits.
A Small Business Association-backed loan (also called an SBA loan) can provide low interest rates if you meet the qualifications for 7(a) loans, 504 loans, CAPLines, export loans, or microloans, depending on your needs.
You can also consider a line of credit, which gives you access to capital as you need it, rather than disbursing one lump sum as a loan would.
Borrowing money from a friend or family member is another option, but tread carefully — sometimes mixing business and personal has disastrous results.
If you have someone close to you who’s willing to lend you money to get started, treat it like a business transaction; draw up a contract and agree on an interest rate and payment plan.
Even if you don’t have great credit, you can apply for loans offered by private companies that specialize in loans for business owners with less-than-stellar credit.
If you need a small amount of money, even a credit card can be a viable option.
Look for one with low or even no interest to cut down on what that financing costs you.
If, for example, you need computers or technology, look for retailers that have their own branded credit card, since they will often give you a discount on a purchase if you open a new account with them.
Tip 3: Know what you’ll spend it on
It can be exhilarating to see a high balance in your business checking account after you’ve deposited your loan money, and it might be tempting to go on a shopping spree, even if it is for your business.
But remember your purpose in taking out financing is to start your business.
Know before you spend a dime what that money will be used for, and spend it judiciously. If you need office furniture, look on Craigslist for used furniture rather than paying full price for new.
Negotiate with vendors to save on supplies you plan to order regularly. Only buy what you need.
Everything you buy should contribute toward the birth of your business and ultimately to its future success.
Tip 4: Have a plan to pay it back
Before you know it, your business will be launched and that first loan payment will be due.
You aren’t guaranteed to bring in revenue or even turn a profit in the first few months, so reserve some of your financing to start paying on your loan until your business starts attracting customers.
When you do start making sales, set aside enough to cover that loan payment, in addition to all other business expenses you have.
The last thing you want to do after starting a business is to default on your loan due to poor planning.
Tip 5: Plan for future financing
Once you’ve paid off that loan, line of credit, or credit card debt, you can breathe a sigh of relief and pocket more of your profits.
But be open to taking out another loan in the future.
When you’re ready to expand into larger commercial space, explore other product lines, or hire more help, business financing can pave the way to make that happen.
If you’re smart about the business debt you take on, it can be a huge boon in starting and growing a successful business.
Susan Guillory is the President of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books and frequently blogs about small business and marketing on sites including Forbes, AllBusiness, and Cision. Follow her on Twitter @eggmarketing.