FINANCING YOUR BUSINESS
The list below provides a description of different methods for financing your new business.
This is the most favorable method of starting a business. There are no loan payments to deplete your cash flow. However, it is difficult for most people to save substantial amounts making it necessary to borrow start-up capital.
Friends and Family
This can be a good source of funding for your business. The thing to remember when borrowing from friends or family is you should treat them like any other creditor. Create a written agreement that states the amount of interest and length of time for repayment of the loan.
If you need a small amount of money to start your business, using a credit card is one method of getting capital. Keep in mind the interest rate is high and if you are a sole proprietor, the interest is not deductible.
The equity you have in your home might be a source of capital. In some cases it can be deductible and the interest rate is generally low. The big risk in this is if your business fails, your home is on the line. Also, you must also secure the loan while you are working at your current employer.
Bank financing can be in the form of a loan with a fixed term or a line of credit. To qualify, one usually needs a good business plan, a personal history of working in a business similar to the one you are starting, sufficient collateral and a strong personal financial statement or guarantor. The interest is usually tied to the prime lending rate and the amount of risk of repayment.
SBA Guaranteed loans
The SBA does not lend money. They do guarantee loans for the purpose of starting or growing a business. For a complete listing of SBA programs go to www.sba.gov.
Venture capital is talked about a great deal. Venture capital is when investors provide funding for your business expecting a good return on their investment. Good return means higher than bank-financed interest. In effect, if you use venture capital, you sell a share of ownership in your business. Most venture capital opportunities are for high-tech companies, but there are exceptions.
Angel funding is similar to venture capital in that you sell an interest in the ownership of your business but the investor is usually an individual with experience in operating a similar business. This individual will typically purchase 20 to 80 percent ownership of your business and will have a hand in its operation. If you choose to search for an "Angel," make sure you understand the terms of the agreement.
Selling stock in your business is a complex process and you must use a professional advisor to ensure compliance with all of the regulatory agencies involved. Check the Internet for Small Corporate Offering Registration information.
Local Business Development Funding
Many community agencies have funds available to support economic development in their area. The funding is typically in the form of low interest loans with favorable repayment terms.
If you watch television, you probably think there is grant money for starting your business growing on trees and access to the funding is as simple as plucking off what you need. This is not the case. Most federal and state small business development grants are awarded to agencies that provide the services to individuals that want to start a businesses. The terms of the grants usually state that the moneys cannot go directly to the business.
Regardless of the source you choose, be prepared to answer the following questions:
- How much do you need?
- How will the loan be used?
- How long will it take to repay the loan?
- How will the loan be repaid?
- How will the loan be secured (collateral)?
- How much are you investing?
All of these questions should be spelled out in your business plan. Before you approach a funding source, practice answering these questions out loud. Find someone to role play with—you want the funding source to know from your responses that you really understand your business plan and believe you can be successful.
What Lenders Look for in a Loan Application
Most lenders rely on a variation of the "8 C's of Credit" when assessing a loan application. Different lenders place different values on each of the criteria.
- Cash Flow