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Finding
The Money For Your Dream Business
By Janet Kramer, CPA |
You’re
ready to start your own business, you’ve written a tight business
plan, you know exactly how much you need…but you don’t
have enough money. Where can you get it? Following are suggestions
for finding money.
Your
Own Bank Account
First and foremost, you’ll have to invest a bit of capital
yourself. Any lender or investor will want to see some risk-taking
on your part. The key here is to be careful. You might already be
quitting your job to take on this new venture, which is risky enough.
On top of that, you don’t want to jeopardize your life savings.
Choose an amount you’re comfortable losing – every cent
of it, if necessary – and don’t go over that amount.
Make sure the sum doesn’t represent more than 20% of your
net worth. If you have a spouse or partner or someone you share
money with, talk it over and make sure you’re both comfortable
with the amount you’ve chosen.
Partner
Up
You have the ideas, know-how, experience and connections, but alas,
no cash. Partner with someone who believes in and wants to invest
in the business. Your partner can be a passive investor or an active
participant, depending on the relationship you both prefer. Make
everything clear from the beginning, put your terms and expectations
in writing, and draw up a legal agreement to protect both of your
stakes.
Sell
Shares In Your Company
Selling shares in your company is like partnering with a crowd of
people. Twenty investors equals twenty potential headaches. Most
investors want one thing and one thing only: return on investment.
This can come in the form of regular pay-outs (dividends or distributions)
or by cashing out the stock. The moment you sell one share of stock
to a friend, family member or casual investor, you lose some degree
of control. If there’s any way to start the business more
simply or to make it through a rough patch without giving up equity,
choose that path instead.
Home
Equity Lines Of Credit (HELOC)
HELOCs can be a great source for business financing. You’ll
often find that interest rates are lower on home equity lines than
traditional commercial loans, sometimes by two or three percentage
points. The drawback (and it’s a huge one!) is that, if for
some reason, you can’t pay back the loan, you risk losing
your home as well as your business.
Microlenders
Microlenders are firms who specialize in business loans ranging
from $500 to $50,000, and they can offer not only money, but also
business counseling. They’re usually affiliated with non-profits
or government-sponsored organizations, and they might be looking
for you as actively as you’re looking for them. They often
have quotas to meet as to how much money they need to place in their
community, so they’re eager to work with budding entrepreneurs
and will often take on risky loans that more traditional lenders
avoid. Search for them under the term, “microlender”
on the Internet.
Commercial
Loans
Traditional loans from banks tend to fall into one of two categories,
long-term or short-term. Long-term are typically used to purchase
assets, like equipment, buildings, land, or machinery, and the assets
are used as collateral for the loan. Short-term are generally used
for the day-to-day operations of the business, such as purchasing
inventory and paying wages, and the repayment takes place in less
than a year. When you’re shopping around for a loan, the key
questions to pose are: duration of the loan, interest rate, monthly
payment, and fees. More than likely, you’ll be required to
personally guarantee the loan, even if you’ve incorporated
your business.
Bankers like
to evaluate potential borrowers using the four C’s of lending:
•credit history – is your credit history and/or the
business’s credit history good, bad or unknown;
•collateral – what can you and/or the business put up
as collateral, tangible assets the bank can seize if the loan goes
sour;
•cash flow – will the business be able to generate enough
revenue to pay all of its expenses, plus pay back the interest and
principal on the loan.
•character – do you have the integrity and drive to
pay the loan back, no matter what.
When you’re
searching for a loan, remember that banks are in the business of
lending money and getting it back. They’ll often say “yes”
to horrible business ideas (if the borrower has impeccable credit
and plenty of assets) and “no” to great business ideas
(because the borrower has shaky credit and no assets). Don’t
let their judgments make or break your business dream.
Working
Lines Of Credit
A line of credit, from a traditional bank, can come in handy. Lines
range from 90 days to several years, interest rates float with the
market, and you pay interest only on the outstanding balance. Even
if you don’t think you’ll need the money, it’s
a good idea to take out a line of credit and to begin to establish
business credit from the beginning days of your operation. Collateral
for the loans is often the inventory in your business or your accounts
receivable.
Credit
Cards
A revolving credit charge card can function as an alternative to
a working line of credit. The largest card issuers—VISA, American
Express, and MasterCard—have small business card programs.
As a source for working capital, revolving credit cards offer a
hassle-free, quick source for limited funds, but their convenience
can be deadly. For every story you read about an entrepreneur who
financed his dream on credit cards, there are thousands of others
have gone down in the flames of bankruptcy.
Equipment
Leasing
If you need to purchase expensive equipment, consider leasing it
rather than paying for it outright. Oftentimes, equipment manufacturers
will provide leases or be able to suggest a reputable, independent
leasing company.
Vendor
Financing
When you’re starting out or well on your way, you can look
to your vendors to provide “financing” in the form of
more lenient payment terms. For instance, if you expect your business
to purchase $5,000 worth of supplies per month, and you can negotiate
terms of net 90 instead of net 30, you will have, in essence, set
up a mini, $10,000 line of credit, at no interest, at your suppliers’
expense.
Venture
Capital Financing
While venture capitalists figure prominently in the media, this
type of financing isn’t available to most small business owners.
Venture capital usually comes from institutional risk takers, who
can be groups of wealthy individuals, government-assisted sources,
or major financial institutions. Most VCs specialize in a few, closely-related
industries and tend to invest $1 million or more per business. They
receive ownership in the business in exchange for the money they
invest, and they rarely back start-ups. They prefer to see some
type of track record, then they’ll jump in and propel the
business to the next level with their investment and active involvement.
The above suggestions
for finding money can be used alone or in combination with one another.
If, by combining them, you still can’t secure the amount of
money you need, go back, look at your start-up costs, and trim everywhere
you can.
It’s
better to dream small than to not dream at all!
©2007
Simple Biz Planning, Inc.
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