Small Business Funding

What type of business funding debt do you want?

Any business will usually be funded in one of two possible ways .., either through debt financing or equity finance.

Just so that we are all on the same page, here is my basic understanding of these two types of financing.

• Debt Financing ...
  You borrow money, normally against some form of security, and in due course you have to repay all the capital borrowed, plus interest charges.
• Equity Financing ...
  You are given money and in exchange you give away part of your future company equity.
  • Remember this, when you are looking for small business funding, and try not to give away your controlling interest, or if you do, be aware of it.

When should you borrow ...

Only when necessary to increase business profitability, period. Borrowing for any other reason is bad business.

Remember, if you want to succeed in your business, you need to watch your expenditure very carefully, especially at the beginning.

Okay you need to watch it always, but before you start making good money down the line, it is vital not to spend money erratically.

If you have started your business using your own resources, you will tend not to spend on non-essentials. Using other people?s money can make you careless, so watch the money you borrow and spend it as if it was coming out of our own pocket.

On that note, let?s decide that you are now sure of the sums of money you require and that, to succeed, you need to borrow.

The possible sources for small business funding are many and varied ...

Here we will take a look at the major fudning sources and discuss where to borrow from.

1. Your Own funds ...

The first call should always be on your own funds. If you have sufficient cash or assets that can be converted to cash and help you to start your business without debt, so much the better.

If you put up your own money you show outsiders that you have faith, both in yourself and your business. This makes it easier to borrow from other sources later.

Here?s how to do it, where to find the assets that you can turn into cash.

• Sell some assets for cash, such as your extra vehicle, boat, collections, etc. Or use them as collateral against a loan.
• Your savings accounts, money in a retirement fund or the equity in your house or any real estate that you own will all provide a means of raising cash.
• Investments in stocks, shares and securities can easily be used to raise some small business funding.
  • Beware however that you do not take the maximum on any possible loans here, with your investments as security. If the market falls you could be in trouble and have to sell your investments to cover the loan.
• If you really really have to do it, you can use your credit cards for cash or financing equipment. Interest rates can be killing, but if you need money for only a short period of time it can be done.
• Your life insurance can also be a source of cash. You borrow against the value of your insurance, with generally reasonable interest rates.
  • In most cases you do not even have to repay the sum advanced, but it will come out of the policy as a deduction when it becomes due. This could be a shock for your descendants!
• For those with a 401(K) retirement plan you can always borrow against the plan. Interest is not a killer.
• If you have an IRA, individual retirement account, and you need some short term cash to help with your small business funding you can withdraw from your IRA.
  • Remember however that this is not a loan, there is no interest, but the money has to be repaid within 60 days.
  • Don?t be late with your repayment or the withdrawn money becomes liable to tax as well as a 10% interest.
• Grant monies are available, but are not easy to acquire.
  • Lots of questions and great deals of paperwork before you get near them and then you are still likely to be turned down ... see Grants for Starting a Business

Raising the cash needed for your small business funding can often be done from personal assets alone, if the sums are not great.

And it always looks good if you can show that you are prepared to use some of your own capital in the business.

I would recommend that you try and raise at least one third of the needed capital from your own resources. The more you put in the less likely you are to lose control of your business.

However, never stifle your growth through lack of cash; borrow if necessary to meet your capital requirements and secure your small business funding.

Raising Small Business Funding from Family & Friends ...

Here is where you get to know who your real friends are.

If you still need finances for your small business funding, family and friends can often be the next easiest source of funds.

Because they know you, they can more easily judge your worth and lend you money against this judgment.

Things to remember and beware of ...

• They are your family and friends, so letting them down can destroy relationships.
• Often, once you have been loaned money from them, they will tend to think that they have a right to tell you what to do.
• Borrow from relatives or friends that show interest in your business idea and that you know can afford it, never from any that cannot afford to lose the money.

Just as you would expect to have to draw up documents and present them to a commercial lender, draw up proper loan agreements with your family or friends if they lend you money.

Keep it all on a strictly business footing, for everyone's piece of mind.

Raising Small Business Funding from Banks ...

When you borrow from a bank, you must remember that no bank will lend without some form of collateral. With assets to cover the loan amount you have a chance at a loan, but this is not guaranteed.

Banks can find a hundred reasons why not to lend you money, including your lack of business experience.

But, your excellent preparation and perseverance will prevail in the long run, so don?t give up.

Always come well prepared with your business plan.

Once you have their agreement for your small business funding, you now have many different varieties of loan to choose from and yes, they are often called different names by different banks. Here are the basic ones ...

• Line-of-credit or overdraft loan, a very useful loan. The bank however is not likely to advance such a loan until you are actually in business.
  • Normally a one year loan, renewable, and is of a fixed sum that can be drawn against if needed.
  • Interest is only charged on the sum drawn down.
  • All businesses should have such a facility on hand.
• Secured loans are required by all banks when a loan is made to a new business without a track record.
  • If you have some collateral, such as equipment, real estate or inventory, then a loan is a possibility.
• Unsecured loans are only given to sound, low risk businesses, where the owner is well known by the bank.
  • Cultivate your bank manager from day one if you think you will ever want an unsecured loan.
• Guaranteed loans are provided on the guarantee of a third party, usually by an investor or the government. If you default, the guarantor repays the bank.
• Commercial loans. These loans are made for small business funding purposes.
  • Community banks are the best for increasing your chances of raising a loan for your new business.
  • It always pays to shop around for the best deal and community banks are often biased towards the local small business owner.

Raising Small Business Funding from Government Loans.

In the USA the federal government is keen to encourage small business and you can often arrange a Government loan facility, more easily than directly with your bank, by using the Small Business Administration (SBA)

The SBA will help you prepare the necessary documents to apply for a loan from a bank.

You have guessed it, the SBA does not in fact loan money itself, it guarantees the loan, and encourages commercial banks to lend to new business.

If the SBA helps put together your application and then guarantees it, you are virtually assured of a loan.

However to gain an SBA guarantee you have to be eligible.

The SBA will look at your credit history, management ability, experience in your chosen industry and finally your new business and it's ability to show sufficient cash flow to repay the loan.

This should not be a problem, because if you cannot show these attributes; you should not be borrowing money anyway.

The SBA has a broad variety of different loans available, so contact them, to find out what would be the most suitable type for your small business funding.

Not all countries have the equivalent of the SBA, but many do, so don't neglect possible government or Non-Government Organization (NGO's) loans for small business.

Raising Small Business Funding from Investment Angels ...

More and more private individuals are looking for better returns on their spare cash, than would be available through traditional bank and stock exchange investments.

Many of them are prepared to invest in start-up companies. So here is another possible source of small business funding for you.

A bit about investment angels before you start.

Despite the name they usually expect a return on their money of between 20% and 25%.

Very seldom will they loan money for longer than five years.

They will expect a large stake in your company, in some cases even 51%, so you in effect no longer own your own company.

So beware that your angel does not become your devil!

On the other hand, if you do your homework and select an angel carefully, there are many who are not in it just for profit.

For more information on investment angel capital contact the Small Business Administration's Active Capital

Raising Small Business Funding from Venture Capitalists.

Not normally a good source of small business funding, but it can be done.

Venture capitalists tend to be very institutionalized and really don't like lending less than $1,000,000.

Venture Capitalists tend to be even worse than angels and often want anything between 20% and 80% of your equity .

Generally they are looking for experienced management and will also expect to see good returns within 3 to 5 years.

Don?t write off a look at venture capitalists for funding, some have more promise than others.

Check out the U.S. trade association for venture capitalists, the National Venture Capital Association.

Raising Small Business Funding from Leasing ...

One further possibility for business funding is business leasing.

In many cases you can lease equipment, computers, vehicles, etc and doing so can considerably reduce your capital needs.

Many suppliers of this equipment will have provisions for leasing. So, remember that when drawing up your business plan.