Small Business Start-Up Guide
by Robert Sullivan
. . brought to you by The Small Business Advisor
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!
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:
want to avoid is having to find additional financing during your startup
phase. It is generally easier to obtain financing the first time around!
equipment (Fax machine, computer)
equipment (for manufacturing)
or production furniture
and CPA fees
licenses or permits
deposits (this can be quite large!)
the big one ... contingency!
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.
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
of you interested in equity financing (venture capital), here are some
suggestions for locating possible sources:
yellow pages under "venture capital companies."
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.
National Venture Capital Association in Arlington, VA at (703) 528
(Savings) You are your own best "lender" if you have the savings. This
approach can be quick and easy.
Ensure you have adequate savings for both the business and other life
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
Many friends have been lost and many relatives alienated because of
a small business failure.
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.
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
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.
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.
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
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.
You are placing your home on the line!
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.
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.
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
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.
CARDS. These should be used with care because of the excessively high
rates of interest usually charged.
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.