Six ideas for financing a new business - By Marshall Loeb, MarketWatch 04-23-08

Apr 23, 2008, 7:25 p.m. EST

Six ideas for financing a new business
By Marshall Loeb, MarketWatch

NEW YORK (MarketWatch) -- You've just been laid off from your job. Or perhaps you've been offered an early-retirement package. In either case, you're not ready to stop working but don't want to go back on the 9-to-5 treadmill. It might be time to start that business you've been dreaming of for years.

But to get your operation up and running, you'll need money -- how much depends on the type of business you're pursuing. According to the Global Entrepreneurship Monitor, a research group, the average cost to start a business in the U.S. was $70,200 in 2005. While that's not exactly pocket change, it isn't a king's ransom either.

Consumer Reports suggests these six potential sources for seed money:

Personal assets. For many people, this is ideal for several reasons. Money held in a bank account, money-market fund or brokerage account is readily accessible and you won't have to pay any interest or fees to get it. But it's not a perfect source. You might put other goals -- a college education for your kids, say, or a comfortable retirement -- at risk by using money you had saved for those purposes. So set a limit on how much of your assets you're willing to risk and stick to it.

Home equity. Arranging a home-equity loan or line of credit is usually quick and inexpensive for qualified borrowers. A line of credit is flexible; you take the cash only when you need it. A home-equity loan has a fixed schedule for repayment. Both types of home-equity debt generally carry lower interest rates than other forms of borrowing. In early March 2008, a $50,000 home-equity line of credit had an average variable interest rate of 5.18%. Interest costs might be tax deductible within certain limits. However, home-equity debt puts your home at risk if your business fails and you can't pay back the loan.

Family and friends. Those closest to you might be happy to lend you money, perhaps at lower interest rates than you might obtain elsewhere. The downside, of course, is the personal risk. If things go bad and they don't get their money back, you can damage or ruin relationships entirely. So make sure family and friends are fully aware of the risks, and don't agree to a "pay me back when you can" deal. Formalize your loan with a written agreement stipulating interest rates and a payment schedule.

Credit cards. Your credit cards are a ready source of funding. Once the card is in hand, you can borrow as much as your credit limit allows. But using plastic for seed money can be quite expensive because the interest rates are higher than for other types of borrowing. Recently, the average for fixed-rate standard credit cards was 13.42%, according to Bankrate.com. Particularly dicey are teaser cards, which start out at a low rate and spike significantly within six months or so.

Peer-to-peer lending. Web sites like LendingClub.com and Prosper.com bring individual borrowers and lenders together. LendingClub.com bases loan rates on the borrower's credit profile. At Prosper.com, parties on both sides negotiate the rate, though borrowers can set a maximum they are willing to pay. The companies oversee loan repayment and provide all the necessary paperwork. Some borrowers have found this is an easier way to get money, at more favorable terms, than through traditional sources. Read more on peer-to-peer lending.

Small Business Administration. This federal agency offers a variety of loans for small businesses. The basic SBA 7(a) loan provides up to $2 million -- sometimes more -- through commercial lenders. But a 7(a) loan requires borrowers to first use other funding sources, including personal assets. SBA Express loans are available for up to $350,000 and, because local lenders don't need to complete SBA paperwork, can be made in as few as 36 hours. Patriot Express loans, for veterans and their spouses, carry a $500,000 maximum. For more details on the programs, contact the SBA at www.sba.gov.