Many foundations provide funding in the form of grants to nonprofit corporations. They usually require that the grant represent a small part of the total funding for an existing organization that gets the majority of funds from individual donations of its members and fund-raising campaigns. Church-sponsored groups receive more grants that anyone else.
Source for debt financing
- Yourself! (Savings). You are your own best “lender” if you have the savings. This approach can be quick and easy. CAUTION: Ensure you have adequate savings for both the business and other life contingencies.
- Friends and relatives. If they believe in you and your idea, friends and relatives are sometimes willing to fund you. Choose this route with care and ensure you execute a formal loan document stating loan terms (interest, terms of repayment). CAUTION: Many friends have been lost and many relatives alienated because of a small-business failure.
- Banks and credit unions. Many banks and credit unions (check with your own first and with your local chamber of commerce for alternate possibilities) will loan money for starting a small business. This approach will require that you present a formal plan to the bank showing justification for the amount you are borrowing.
- Small Business Administration (SBA). Check out their website (http://www.sba.gov). Contrary to what many believe, the SBA does NOT generally loan money directly but rather guarantees a loan (normally up to 90%). This can make it a lot easier to obtain a bank loan since the bank’s risk is lowered considerably. The exception is that the SBA does provide direct loans to certain groups including Vietnam-era and disabled veterans and handicapped individuals. In general, the SBA will not offer any assistance until you have been turned down for a loan by a commercial bank.Most loans guaranteed through the SBA are between $25,000 and $750,000. However, there is a “micro-loan” program for amounts from a few hundred dollars up to $35,000.
- Vendor financing. If your business is one that relies heavily on certain vendors, it may be possible to obtain financing through the vendor. After all, they want you to use their product and therefore have an interest in helping you be successful.
- State. Some states have small-business financing authorities that issue tax-exempt development bonds to be used to finance land, buildings, and equipment for manufacturing businesses. Check with your local government office for details.
- Home equity loan. Interest rates for this kind of loan are generally low and the interest is fully deductible for the first $100,000 borrowed. CAUTION: You are placing your home on the line!
- Life insurance. Some type of life insurance policies (whole life and universal) have cash value which can be borrowed at very low interest rates. You are not obligated to pay this money back but if you don’t, your policy payout is reduced by the amount borrowed.
- Retirement plans. Some retirement plans (401K, for example) allow you to borrow against vested benefits. Generally, up to 50% may be borrowed as long as this is less than $50,000. CAUTION: If you quit your employment, the loan must be repaid immediately. If you don’t the amount borrowed is treated as an early distribution and is taxable.
- Credit cards. These should be used with care because of the excessively high rates of interest usually charged.