Captain BUZ's Blog
Perspectives about small business start-up, growth and success.
Where's the money???
May 5th, 2008
Lucille from Alaska wrote to me with the following question:
Dear Captain BUZ:
We are getting ready to launch our business but now I am very worried with all the stories I am hearing about the banking troubles. My question is: Where can I go to finance my business?
Dear Lucille,
This is not a simple question to answer.
The first questions are:
- How much financing do you need? And
- What do you need it for?
The good news is that there are ways to finance both the start-up and growth of your business:
- Family, Friends and Fools
- US Small Business Administration
- State, Regional and Local Programs
- Commercial Mortgages
- Merchant Advances
- Factoring
- Venture Capital and Angel Investors
But first, here is a typical and unfortunately unhappy scenario:
You know you need financing to start your new venture - after all, most new businesses do - right?
You go to your friendly neighborhood bank and share your new idea and enthusiasm. Unfortunately, unless you have a great deal of personal collateral, or unencumbered assets, that you can pledge, the bank will tell you that they do not lend to start-ups. Their advice - use your own resources, savings, and resources other family members or friends may loan, and get started that way. Come back in six months with a track record, and they may be able to reconsider.
Elated with that advice, you go home, use your savings, borrow some more from your family or friends, take a home equity loan on your house, and, because you still need more financing, take advantage of multiple credit card offers and max out on each.
You survive the six months and eagerly go back to your bank. They tell you - but you don't have any personal resources, you have maxed out your real estate, and you are top heavy with high interest credit card debt. As a result of all of this, your credit score is through the floor and so, of course, they can't loan you any more.
How to avoid this sad story?
Start with what I said earlier:
- How much financing do your need? And
- What do you need it for?
What exactly do you need this start-up financing for - to fund a start-up / to cover a cash flow gap as you grow? Well, consider this: Don't spend the money!
Do you really need a whatever? Can you buy second-hand? Is it essential to your operation - or can it be postponed? Can you lease vs. tying up precious capital? Can you get customers to pay earlier? Can you get suppliers to extend payment terms?
Have a financing plan, manage growth and manage your spending. If you still need some early stage financing, there are some alternatives to consider. Check out this article in BUZGate: Financing Proposal.
If, after considering what you really need for financing you still require outside resources, there are options to consider:
US Small Business Administration (SBA)
The SBA does not directly loan money to businesses, but indirectly and through local and online financial institutions, offer a number of financing programs:
Microloans - These are SBA loans made to community non-profits who, in turn, loan money to very small and emerging businesses.
CDC 504 Program (Certified Development Company) - These are SBA loans to a CDC who then makes long term loans to business for major fixed assets, such as land and buildings. They may also partner with local banks or other programs to put together the loan.
7(a) Loan Guaranty Program - Here, the SBA guarantees a portion of the business loan (between 50%-85% depending on the program) acting much like a co-signer, and a conventional bank provides the actual loan. This approach allows conventional lenders to work with businesses that might not otherwise meet their loan requirements, such as business start ups, or a borrower with limited collateral.
Specialized versions of the 7(a) program target disadvantaged groups such as minorities or women, or target disadvantaged neighborhoods. A new program was recently announced to help veterans returning from Iraq and Afghanistan.
Visit our SBA Edutorial to learn more.
State and Local Programs
There are many innovative state, regional and local programs that offer financing options for business ventures that are geared to supporting economic development and job creation.
For example, another BUZGate.org user wrote us who needed money to purchase capital equipment for their manufacturing business. We introduced them to a LDC (Local Development Company), which allowed them to leverage federal funds with local funds to pay 100% of the cost of purchasing two large flat-bed routers at $125,000 each. A short time after that, we introduced them to a state-based investment program, which provided them with a royalty-based investment to support R&D costs and the subsequent launch of a new product line.
Check with your state of local office of economic development to learn more. Offices are listed in BUZGate under Free Help: Business Funding.
Other Programs
There may be still other alternatives you may be unfamiliar with.
Commercial Mortgage: For example, if you possess commercial real estate, you can borrow against the value of the property using a Small Business Commercial Loan. You can download a free Guide to Commercial Mortgages. Click here to learn more.
Merchant Advance: If you have been in business two or more years and have a history of accepting credit cards as a form of customer payment, you may be eligible for raising capital against the value of those credit card revenues. This cash advance is satisfied as a percentage of future credit card sales. Click here to learn more.
Factoring: A further innovative approach suited to financing growth without giving up equity is to utilize a process called factoring. Factoring refers to the process of selling your accounts receivable invoices to a third party who then performs the function of collecting the invoice. Called factors, these agents can move quickly to get funds to a business for a fee as a means of providing financing for growth. Click here to learn more.
Finally, what about venture capital and angel investors?
Although you may hear great stories about investments from such parties, the reality is that only a very tiny fraction of a percent of businesses who apply are even seriously considered, much less financed. Visit www.Ace-Net.org to learn more.
As you can see Lucille, there are many alternatives open to those determined enough to really explore the possibilities. Your local SCORE office can help you in this process as well. Visit our SCORE Edutorial to learn more.
Best of luck, stay focused and make conscious choices.
Sincerely,
Captain BUZ
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