How to Get Working Capital for Your Small Business

by Neal Frankle, CFP ®

Are you wondering how to get working capital quickly and inexpensively ?

Here is a practical guide to help you determine how much money you need and the best place to get it.

Get clear on your objective.

Your objective should be to launch the business successfully with the least amount of cash possible. This is a key ingredient if you want to know how to make a business successful. The last thing you want is too much debt. I want you to really think about what you just read.

The first part of the sentence is “launch the business successfully.” Most small businesses fail because they don’t have enough working capital. Don’t fall victim to that.

How much does it cost to start a small business like yours? To get all the pieces together? (Equipment, office space, employees, etc.)

How long will it be until you start generating revenue? What will that cash flow look like? How much and when?

Be very conservative in your estimates. If you plan on generating revenue and it doesn’t materialize, you may run out of money and have to shut your doors. Make sure your business doesn’t fail because you were too optimistic about revenue projections. Be realistic. Scratch that. Be pessimistic. Plan for the worst. You’ll thank me if you do.

Now, having said that, you need to rack your brains. Try to find every way you can to reduce your expenses.

I launched my business from a spare bedroom 15 years ago. I didn’t buy a phone system or rent an office until I had a reliable source of income. I cut my expenses to the bone when I launched my business. What can you cut to reduce expenses?

Any cuts you make will reduce the amount you have to borrow…so get out the big scissors and start snipping.

Show and tell.

Contact five other successful business owners and ask them to look over your business plan and cash flow projections. Ask them to point out things you missed. Where are the flaws?

It doesn’t matter if these business people are in a similar business or not (although it would help). Get in front of people who have been there and done that. They’ve walked through enemy fire. They’ll show you where the landmines are.

Having created a conservative financial plan, cut as much as possible and then asked business owners to go over your plan, you’re ready to look for start-up capital:


Banks have been forced to tighten their lending policies. It might be really hard to get them to fund your business – especially if you don’t have assets or a track record. (Read Borrowing Money.)

Even if the bank does offer you a loan, it will probably be a “recourse” loan. That means they’ll go after your personal assets (like your home) if you fail to make the loan payments. Every bank is different, so shop around. If you have a personal relationship with a banker, you might find favorable terms.

Government Loans:

If you can get a small business loan from the government you’ll probably get a loan with great terms, low interest rate and long repayment terms. There is one hitch – it’s a royal pain in the arse to get one of these loans. It can take forever. Many entrepreneurs either give up or find alternatives because the process takes too long. So if you are going this route, you’ll have to plan far in advance and be patient. Check the Small Business Administration website for more information.

Loans from Family and Friends:

I’ve only borrowed money once from family and friends. It worked out OK because they all got their money back. When I borrowed the loans, I told them I’d do my best but I had no idea when I would be able to pay them back. The people who could make the loan on those terms participated and those who couldn’t take that risk didn’t.

Make sure you tell your friends and family what the risks are and what your debt payment plan looks like. Whatever you do, don’t be overly optimistic. It will set up unreasonable expectations and lead to hard feelings.

That’s a bad move. But let’s look at the bright side. In today’s world of ultra-low interest rates, many people you know might be interested in getting a better return on their money by loaning it to you. Just remember they want it back.

Make sure you do it right. Make a written contract or promissory note for the loan with specific repayment terms. Consider using Legal Zoom to create that document inexpensively.

Just keep in mind that when you mix money and family, you run the risk of losing both. Be careful.

Your Home:

If you have equity in your home, you might want to tap into it. You can refinance or get a home equity line of credit.

If you get a bank loan, you’re really tapping your home equity anyway. I say this because you will have to put up your home as collateral usually.

This is another reason why you want to slash the costs of launching your business. You want to take the least risk possible. You have a lot at stake.

Credit Cards:

OK…I’m not a fan of this option.

It might seem like an easy way to go, and heaven knows the credit card companies push money at us like it was dope. But don’t fall for it.
Rates are high. You might get better terms from Don Corleone than from your credit card company.

If the only way you can launch your business is to fund it with credit card debt, that could be a sign that you should not launch your business.

Get a Partner:

I’m not a huge fan of this option either, but it works for some people.

If you’ve got the ideas and someone else has the money, a partnership might work. The problem is that the person with the money might also have some ideas of her own. Partnerships often lead to conflicts unless the spheres of responsibility are clearly drawn.

Peer-to-Peer Lending:

This is an option I actually do like for the right person and business. If you have a clean credit history and a very solid business idea, you might go this route.

You’ll contact a company like Lending Club and post a little information about yourself and why you want the money. Investors who like you and your idea will loan money to you without you having to hit up your friends or put your home equity on the line. For more information, see my Lending Club review.

If you have good credit, you’ll pay far less than most of the options listed above and you’ll get the money faster. Best of all, you won’t have to face your Uncle Jack at Thanksgiving asking you how things are going with an accusatory tone.

Your Retirement Accounts:

Forget this.

I know you think you have a sure thing on your hands but you don’t.
Every business has risks. You deposited money into your retirement account for…you guessed it…retirement.

If you withdraw this money, you’ll have to pay high income taxes on it and you might have to pay penalties as well.

It’s just too expensive. Don’t do it.

If you have a 401k at work, you might be able to take a loan out against it but I still don’t want you to go this route.

If you lose or leave your job, most plans require that the entire loan be repaid immediately.

Are there other alternatives I overlooked? How did you fund your business? How are you planning on funding your next business?


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{ 1 comment… read it below or add one }! May 27, 2010 at 9:53 AM

“If the only way you can launch your business is to fund it with credit card debt that could be a sign that you should not launch your business.”
<< Well said!
Financial advice +Quality HipHop + Ridicule


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