Financing Your New
Business
By Dr. Robert Sullivan If it is at all possible, you should
start your business without any funding beyond
your own. Do this by starting slowly and in
conjunction with present employment. Start your
business by working evenings and weekends while
keeping your present job as long as practicable.
This way, if the business does not meet your
expectations, you have not incurred debt and will
still have a job!
However, in many instances
outside funding will be required depending on the
nature of the business. For example, expensive
equipment or initial stock may be required. When
determining your financing needs, remember that
nearly everyone underestimates what is required
so be careful and do your planning accordingly.
And of course, don't forget to factor in
contingency ...sickness, bad weather, equipment
breakdown, etc. Anything that increases the time
line to profits! Best you figure on a year before
you start.
- Office equipment (Fax
machine, computer, printers)
- Production equipment (if
you will be manufacturing)
- Office or production
furniture
- Office supplies
- Legal and CPA fees
- Insurance
- Business licenses or
permits
- Lease deposits
- Remodeling costs
- Utility deposits (this can
be quite large!)
- Salaries
- Shipping
- Advertising and promotion
- and the big one ...
contingency!
What you want to avoid is
having to find additional financing during your
startup phase. It is easier to obtain financing
the first time around!
There are two major forms of
business financing.
- DEBT
FINANCING. This
simply means you get a loan from someone
or somewhere and go into debt! You are
obligated to repay the money.
- EQUITY
FINANCING. This
involves "selling" a portion of
your company to an outside investor. You
have no obligation to repay the funds. In
general, this type of funding is provided
by venture capital firms.
The fact is, 99.99% of all
small businesses will utilize debt financing
since most "equity lenders" (venture
capital companies) are interested in lending
large amounts of money, generally a million
dollars or more. We will only consider sources
for obtaining debt financing for your venture.
For those of you interested in
equity financing (venture capital), here are some
suggestions for locating possible sources:
Check the yellow pages under
"venture capital companies."
Check out http://www.vcworld.com, Venture Capital World Online. They
provide a direct database link between investors
searching for opportunities and entrepreneurs in
need of venture capital.
Check with the National Venture
Capital Association in Arlington, VA at 703 528
4370.
SOURCES FOR
DEBT FINANCING
- YOURSELF! (Savings) You are your own best
"lender" if you have the
savings. This approach can be quick and
easy.
CAUTION:
ensure you have adequate savings for both
the business and other life
contingencies.
- FRIENDS
and RELATIVES. If
they believe in you and your idea,
friends and relatives are sometime
willing to fund you. Choose this route
with care and ensure you execute a formal
loan document stating loan terms
(interest, terms of repayment).
CAUTION: Many friends have
been lost and many relatives alienated
because of a small business failure.
- BANKS and
CREDIT UNIONS. Many
banks and credit unions (check with your
own first and with you local chamber of
commerce for alternate possibilities)
will loan money for starting a small
business. This approach will require that
you present a formal plan to the bank
showing justification for the amount you
are borrowing.
- THE SMALL
BUSINESS ADMINISTRATION (SBA). Check out their website (http://www.sba.gov). Contrary to what many believe
the SBA does NOT generally loan money
directly but rather guarantees a loan
(normally up to 90%). This can make it a
lot easier to obtain a bank loan since
the banks risk is lowered considerably.
The exception is that the SBA does
provide direct loans to certain groups
including Vietnam-era and disabled
veterans and handicapped individuals. In
general, the SBA will not offer any
assistance. Most loans guaranteed through
the SBA are between $25,000 and $750,000.
However, there is a "microloan"
program for amounts from a few hundred
dollars up to $25,000.
- VENDOR
FINANCING. If your
business is one that relies heavily on
certain vendors, it may be possible to
obtain financing through the vendor.
After all, they want you to use their
product and therefore have an interest in
helping you be successful.
- STATE. Some states have small business
financing authorities that issue
tax-exempt development bonds that be used
to finance land, buildings and equipment
for manufacturing businesses. Check with
your local government office for details.
- HOME
EQUITY LOAN.
Interest rates for this kind of loan are
generally quite low and the interest is
fully deductible for the first $100,000
borrowed.
CAUTION:
You are placing your home on the line!
- LIFE
INSURANCE. Some
type of life insurance policies (whole
life and universal) have cash value which
can be borrowed at very low interest
rates. You are not obligated to pay this
money back but if you don't, your policy
payout is reduced by the amount borrowed.
- RETIREMENT
PLANS. Some
retirement plans (401K for example) allow
you to borrow against vested benefits.
Generally, up to 50% may be borrowed as
long as this is less than $50,000.
CAUTION: If you quit you
employment, the loan must be repaid
immediately. If you don't the amount
borrowed is treated as an early
distribution and is taxable.
- GRANTS. Many foundations provide
funding in the form of grants. Check
"The Foundation Directory" at
your local library or visit their website
at http://fdncenter.org to find out what foundations
may have an interest in your specific
business idea. The Foundation Center may
be reached at 212 620 4230.
- CREDIT
CARDS. These should
be used with care because of the
excessively high rates of interest
usually charged.
A FINAL NOTE. Remember that
many of these loan ideas will require you to sign
a personal guarantee. This means that regardless
of what happens to your business, you are
personally liable for the repayment of the loan
amount. Think carefully before signing.
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Robert Sullivan is the author of The
Small Business Start-Up Guide, and United States
Government - New Customer!. He frequently
lectures on starting small businesses and appears
on CNBC's "Minding Your Business" as a
small business expert. His books may be ordered
toll-free by calling 1 800 375 8439.
Robert also
developed and maintains an extensive
award-winning Internet website, "The Small
Business Advisor," at http://www.isquare.com)
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