ABA Family Legal Guide

Forming and Operating a Small Business

Starting a Business

Financing a Business

I think I can get a loan from my bank. What do I need to consider?

Commercial banks and other commercial lenders are a possibility for additional working capital, though they know very well the high failure rates of new businesses and probably will take a lot of persuading to part with some of their money for your start-up. Expect to go through a lengthy application process. It could mean lots of time and paperwork.

If you do decide to borrow capital, the business must have collateral to secure the loan--something tangible the bank can take to recover its losses if you can't pay the debt. Most start-up businesses don't have a building or a fleet of trucks that can be pledged as collateral, nor do they have a big stock of inventory or accounts receivable that could be pledged. As a result, banks will generally require personal guaranties and collateral from the owners of the business. This means that you will have to back up the loan with your home or other valuable property to get funding--and that you could lose this property if you fail and default on the loan.

You've also got to consider the long-term effect of paying off the debt. Most rates of profit are under 10 percent, making the assumption of an interest-paying burden of even just 10 percent a severe strain on a business.