Funding options for aspiring New Jersey startups

Once New Jersey citizen decide to start a business, the next question is often where to get the funds to finance it. Fortunately, a variety of funding sources exist for forming a business. At the same time, startups should know upfront the benefits and drawbacks of each before going forward.

One option for financing a new business is the backing of family and friends. For people in the enviable position of having family and friends that can provide a loan at little or no interest, keep in mind the personal ramifications that can pop up if financial difficulties arise.

Another option is investing one's life savings and running up credit on personal credit cards. This approach may enable an entrepreneur to feel independent, but it is dangerous. Credit cards carry high interest rates -- regularly as much as 19 percent -- that can be hard to pay off. Worse, it can wipe out the entrepreneur's personal safety net. If that happens, it will also make it harder to get business loan or line of credit later.

A home equity line of credit is another alternative. However, it can hurt the entrepreneur's personal credit rating and is limited to the value of the home. So, for example, if the business needs $500,000 to startup, but the value of the house is $200,000, then the entrepreneur will need to find another source of financing to make up the remaining cash.

Crowdsourcing is a new and increasingly popular option. Crowdsourcing is a process in which many individuals, especially family, friends and acquaintances, provide small amounts of money. It operates similar to a corporation raising funds by selling stock. When an entrepreneur needs more than $50,000 though, crowdsourcing likely will not work.

Finally, entrepreneurs may want to talk to the Small Business Administration. The agency has a variety of loan options designed especially for the needs of small businesses. These options include microloans, SBA 7(a) loans, Disaster Loans and the CDC/504 Loan Program.

Source: Fox Business, " Five Funding Options for Starting Up," Rohit Arora, July 24, 2012

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