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The Small Business Start-Up Guide
by Robert Sullivan
CHAPTER 4
FINANCING YOUR BUSINESS
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 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 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 len-ding large amounts of money, generally a million
dollars or more. Here 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:
- The yellow pages under "venture capital companies."
- Venture Capital World Online on the internet located at:
http://www.vcworld.com. They provide a direct database link between
investors searching for opportunities and entrepreneurs in need
of venture capital.
- The National Venture Capital Association in Arlington, VA at
(703) 528 4370.
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 guaran-tees
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.
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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