Looking for funds to start a small business? Need capital to expand an existing one? If the answer is “yes,” the next step for many owners is a trip to their local bank to secure a loan. Unfortunately, few are successful. That’s why it’s important to learn about all of your options first. Consider the range of loan choices you have before deciding which is right for your small business.

Do You Really Need a Loan?

Before you look for outside funding, take a look at whether you can self-fund first. That’s the advice WESST Regional Manager Clint Reecer gives to clients looking to start a business. WESST is a development and training organization. They provide consultation and SBA-backed loans to small business owners in New Mexico.

Reecer finds that the vast majority of start-ups don’t need a loan. Instead, he asks them to look at internal sources first—savings, family members, selling personal assets.

“It’s difficult for start-ups to earn the kind of return needed to pay back a loan right away,” he said. “So if you can invest your own money without incurring debt, you don’t have those pressures.”

He also recommends funding a start-up with a full or part-time job at first. Having a steady income stream helps you get on your feet before relying totally on the business. In fact, he recommends individuals have 3-6 months of savings before starting.

The Right Loan for the Right Business

There are several different funding options for small businesses. Reecer often gets questions from clients about which is right for them. He tells them it depends on their business. Here are a few of the more popular options:

• Traditional commercial loans. Established businesses are more likely to have success with these. They have assets, a sales record, and revenue history. Typically the loans are for larger amounts of $100,000 or more. Lenders want businesses that can demonstrate the ability to pay back the loan in a short time.

• Small Business Association (SBA) loans. Start-ups are good candidates for these because they provide for smaller amounts ranging from $10,000 to $250,000 with approachable interest rates. When combined with personal sources, these smaller amounts can often provide the funds needed to start.

As a loan officer for these microloans, Reecer looks at credit scores and history but places more emphasis on other factors.

“I look closely at their business plan to determine how well thought out their strategy is,” he said. “I want to see how they plan to manage the business to return a profit.”

That gives start-ups who may not have a track record the chance to demonstrate that they are loan worthy. Once they develop a successful history with a smaller loan, it can be easier to secure larger traditional loans in the future.

• Crowdfunding. This relatively new source relies on small contributions from large numbers of people, often on the Internet. Kickstarter is one example. It might be appropriate if you are launching a new product.

“It’s important to understand that you are promising to deliver a functional, working product to your investors,” Reecer said. “Investors can take action if you don’t deliver on it.”

• Credit cards. While credit may be readily available, Reecer advises businesses against using this as a start-up or expansion source. It’s important to look at the rate and terms to see the real cost.

“The rate for most credit cards is around 15-25 percent. That compares to just 5-8 percent for a small business loan,” he said. “You’re paying less if you use the right debt product.”

Reecer cautions that credit cards should be used to finance short-term debt when no other options are available. It can be used to manage cash flow since the monthly debt is consolidated into one bill.

There are a number of choices that owners have to fund their small business. It’s important to consider the needs of a start-up compared to an established business before deciding what works best for you.