The would-be entrepreneur's handbook

The right financing depends on your situation - and what you can get. These are the most common options, from cheapest to most expensive:

CASH/SAVINGS

Good choice if... ...you have the money. Can't beat the 0% interest.
bad choice if... ...your only way to get cash is to tap your emergency or retirement funds.

FRIEND AND FAMILY LOANS

Good choice if... ...they'll agree to it. So no one incurs taxes, make sure they charge you the "applicable federal rate"--recently 1.4% to 5.8%, depending on the term; find it at irs.gov--on loans above $12,000.
bad choice if... ...your generous relative isn't also forgiving. Some 14% of these loans end up in default, according to a study by peer-to-peer loan facilitator VirginMoney.

HOME EQUITY LINE OF CREDIT

Good choice if... ...you have a lot of equity and need a little. A FICO score above 700 and at least 20% equity is key to getting approved. Rates average 5.3% (variable) and are falling.
bad choice if... ...you have little equity or home values are falling a lot in your area. Also, since your home is the collateral, don't take this loan on if there's a chance you'll default.

BANK LOAN

Good choice if... ...you can get one. It's especially hard for start-ups to qualify. Community banks and credit unions are your best bets. With a FICO score of 700 and collateral, expect a fixed rate of 5% to 10%.
bad choice if... ...there's any chance you'll default, since you typically need to put up collateral.

SBA MICROLOAN

Good choice if... ...you need less than $35,000 and can swing the 8%-to-13% rates. Your Small Business Development Center should have leads on which local nonprofits make these loans.
bad choice if......you can't swing the interest rates.

CREDIT CARD

Good choice if... ...you can get a low rate (the average is now 11%) and are sure you will never ever miss a payment. Penalty rates can go up to 36%.
bad choice if... ...you're flaky with bills, lack the willpower to pay more than the minimum or can't get a low-rate card.

VENTURE CAPITAL/ANGEL INVESTORS

Good choice if... ...you have an innovative healthcare, tech or engineering idea that will generate some $50 million in sales yearly.
bad choice if......you don't have a big, big idea. Frankly, you have better odds of dying from a fall in the bathtub.



NEXT: Step 9: Lure customers, on the cheap