Capital sources: When you have money

Many startup businesses are self-financed, meaning owners use their personal savings and old-fashioned bootstrapping. They liquidate their savings accounts and write checks. They roll the income from sales and services into the business and work up one notch at a time. It can be slow going, but without a big debt load the personal risk remains low. This course is best if the person has a few years to save before starting a business.

Those with a history of repaying loans on time may be able to get a personal loan of $5,000 or more on just a signature. Signature loans -- with no collateral -- are considered unsecured loans and carry a fairly high interest rate, from 12 percent and to as much as 20 percent, depending on the lending institution. Unsecured signature loans such as these are not popular with commercial banks, though. You have a greater chance of obtaining one from a credit union or a finance company.

To get a decent interest rate on a personal loan, or to even be eligible for a personal loan through a bank, a lender may suggest that you borrow on secured savings, such as a CD, which can be pledged as collateral. Cash and tangible assets can be used to leverage low-rate loans. Some banks will accept savings passbooks but prefer CDs, stocks and bonds. The amount of the security must be equal to or greater than the amount requested for the loan.

Company downsizing and redirection have left many people flush with severance pay and buyout checks. These lump sums of cash can be invested and used to provide leverage without having to move the principal. There are no guarantees, but the stocks and bonds in which your money is invested may earn more than the loan is costing. This arrangement is also a good way to establish a favorable credit relationship with a bank.

Example:
You need $25,000 and you have $25,000 to $50,000 in savings. If you take out a $25,000 certificate of deposit, then ask the bank for a personal loan secured by the CD, chances are good that you will get the amount desired with a decent interest rate. The interest rates will normally be between subprime to prime plus points, or between 7 to 9 percent. The CD will continue to accrue interest, which will offset some of the debt interest.

To obtain a loan of this type you'll need a personal financial statement explaining assets and liabilities, and an application.

What you'll pay:
Let's say you take out a personal loan of $25,000 secured by a CD of equal or greater amount. With loan interest of 9 percent to be paid over 36 months, your payments would be $794 a month and your interest charges would add up to $3,619 at the end of the three years. Meanwhile, your CD is accumulating 4 percent or 5 percent interest, depending on current rates, which will offset some of the debt interest. A $25,000 CD, for example, that earns 5 percent interest compounded monthly would be worth $28,941 in three years.