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How to Borrow Money for Your Business

Everyone who starts or runs a business at some time, may need to raise capital for the venture. There are a couple of approaches that can be taken. Some people invite investors to share in a percentage of the business, and then later split the profits. Other business owners prefer to simply borrow the money and pay a percentage of interest on those funds. The advantage of the first method is the sharing of liability in the venture. The advantage to the second method allows the owner to retain more of the profit, should the company succeed.

Some business owners borrow money privately from family or friends. Alternately, they may apply for a loan from a bank or other type of funding institution. Some business owners use a combination of both approaches.

However one decides to secure capital, they  will need to sign a promissory note - a legally binding contract that specifies the terms under which they will repay the funding. Promissory notes contain how much is borrowed, what interest rate is used, and how much payments will be. The loan may be secured, if one is pledging assets  that  will be forfeited, should they be unable to repay the loan. Some loans are “unsecured”, which means they are not obligated to risk any assets.

Even with a close friend or family member, it is wise to put your agreement in writing. This will often avoid confusion or misunderstandings later that could strain the relationship.

There are many different structures for repayment. A very common one is to make equal monthly payments until the entire amount is paid off. The monthly payment amount is determined by taking the total length of time agreed upon to repay the funding, and dividing the loan plus interest by the number of months to determine the monthly payment.

One can also structure to pay only part of the loan in monthly installments and then have a lump sum due at the end of the time period, usually called a “balloon” payment. One can also agree to pay only the interest in monthly payments and then pay the entire principal amount at the end, or even accumulate the interest and pay it AND the principal together at the end of the loan term.

The advantages of paying more along the way decrease the stress of how much you must have at the end of the loan term. Being able to delay payment longer gives more time for the business to create profits and have the funds easily available.

Whatever method one agrees to, be sure to plan for it so they can act responsibly in their contract.

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