Financing Your Small Business
Author: Eran Salu, JD, MBA, CPA
If it is at all possible, you should start your business without any funding beyond what you have available. 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, depending on the nature of the business outside funding may be necessary. 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 see a profit. Here are some items to keep in mind when preparing your startup budget:
* Office equipment (Fax machine, computer)
* Production equipment (for manufacturing)
* Office supplies
* Legal and CPA fees
* Business licenses or permits
* Lease deposits
* Remodeling costs
* Utility deposits (this can be quite large!)
* 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 generally easier to obtain financing the first time around!
There are two major forms of business financing.
1. DEBT FINANCING. This simply means you get a loan from someone or somewhere and go into debt! You are obligated to repay the money.
2. 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. This article will only consider sources for obtaining debt financing for your venture.
SOURCES FOR DEBT FINANCING
1. 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.
2. FRIENDS and RELATIVES. If they believe in you and your idea, friends and relatives are sometimes 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.
3. 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.
4. 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 bank's 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 until you have been turned down for a loan by a commercial bank.
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.
5. 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.
6. STATE. Some states have small business financing authorities that issue tax-exempt development bonds that can be used to finance land, buildings and equipment for manufacturing businesses. Check with your local government office for details.
7. 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!
8. LIFE INSURANCE. Some types 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.
9. 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 your employment, the loan must be repaid immediately. If you don't the amount borrowed is treated as an early distribution and is taxable.
10. 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.
11. CREDIT CARDS. These should be used with care because of the excessively high rates of interest usually charged.
CAUTION. 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.
http://www.TotalBusiness.com is a Website that provides business owners with the information they need in order to successfully start, manage, grow, and sell their businesses.
The site features over 3,000 articles and 60 guides on business topics such as starting a business, financing a business, sales and marketing, building a website, setting up an office, hiring employees, and selling a business. The site also contains articles on legal and accounting issues affecting businesses and allows business owners and entrepreneurs to get free expert advice from local lawyers or accountants. The site contains over 1,000 business forms and agreements that are helpful to business owners and provides a business directory with over 1,700 merchants who provide services specifically for small businesses.
About the author: Eran Salu, JD,MBA,CPA is the Founder and CEO of TotalBusiness.com