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Here's a discouraging fact that you might already be aware of: the most common way for a small business owner to borrow money to start a business is to take out a mortgage. On his own house. The Catch-22 of borrowing money is that your business normally has to have a track record as well as collateral before you are eligible for traditional bank financing.
However, don't let failure in your first efforts at finding money sour you on the prospects forever. If you can demonstrate a couple of years of strong cash flow, it's time to think of using bank credit to leverage your resources.
Bank financing can be either short-term or long-term. The most common short-term credit option is a credit line that lets you borrow up to a set maximum for a period that can be as long as 3 years. If you are eligible for a credit line, it can be a great tool to smooth out the bumps in your business cycle. This is one case, however, where more is not always better: a business will normally pay a small but not nominal fee for not using its full credit line. Therefore, project what your maximum cash flow shortage will be, before you apply.
Many of the other traditional short-term options—including loans against inventory and equipment—are most useful to manufacturing firms. Borrowing money against receivables, though, is an option that can be used to advantage by some firms. And unsecured credit is not out of the question for small businesses that can show a strong track record of growth and profitability.
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