Self and Family Financing

• Many entrepreneurs turn first to their own wallets to inject working capital into their business. You can do this in two ways: with actual cash on hand and by taking out personal loans.
  
  Of the two, it's much better to use money you already have; it's the only way your business is likely to receive a zero-interest loan. However, you should still consider whether your business is a good investment, from the perspective of your personal finances:
  
  1) If your business needs capital, it should be considered a risky investment--regardless of your perception of your chances to succeed. Would you consider making a similar loan to a colleague in the same situation? If not, be careful about risking your personal assets on your own endeavor.
  
  2) Will you or your family be put into a bad financial situation if you make the loan and your business fails regardless? This can put dangerous stresses both on you and your business, which might endanger even a sound business plan.
  
  Everything said about investing your own money goes doubly for financing your business on credit; not only are you risking your capital, but you'll be also paying interest on that investment and raising the bar for success. Business self-help books and magazines are full of stories about entrepreneurs who started their businesses by maxing out their credit cards; you're not likely to hear, however, about the much larger pool of failed business owners who incurred a crushing 20 percent interest rate on their startup costs.
  
  

Government Loans and Assistance

• When formal bank financing is unavailable, federal, state and local governments can be a good alternative. This is especially true if you fall into one of several supported categories of small businesses: women- and minority-owned businesses or those started in special business development or "empowerment" zones.
  
  The first place to go to find out what government financing might be available to you is the Small Business Administration, which acts both as a funder and as a clearinghouse of information about alternative financing. Also register with your local Small Business Development Center, which can be an excellent resource for local funding and financial opportunities.
  
  

Community and Private Social Organizations

• Sometimes the best way to raise capital is from like-minded entrepreneurs. One of the oldest funding sources for small businesses is for groups to gather together and pool their resources; each month, every participant donates a small amount to the group, which is then paid out in a lump sum to the member most in need of capital or rolled over as an investment for the following month. Such organizations also advise one another on business issues and help steer each other to success.
  
  Obviously, in such a group, trust is paramount to prevent early capital recipients from absconding without contributing in the future, so these organizations work best when strong social ties exist between all participants, and a price is to be paid in public opinion if anyone breaks faith with the organization.