Venture Capital | Self Financing | Commercial Loans | Special Interest Financing | Florida-Based Loan Programs | Crowdfunding | Grants
Running out of money is not the primary reason businesses fail, but it can be a contributing factor if you don’t plan ahead for financial stability. Ideally, you have set aside the necessary funds to get your business off the ground. Your next step is to go looking for people and institutions that can provide additional money as your business begins to grow.
Get Investors Interested
Equity financing typically comes from a family member, friend or group of investors who expect some level of control in the business and/or a percentage of future profits.
Venture capital firms or private individual investors called “angels” may be willing to make money available for your venture if they see potential.
Venture capital firms are often controlled by banks, insurance companies and large corporations; angels are generally wealthy individuals who are looking to support “hot” ideas and untapped investment opportunities. In either case, be prepared to present a business plan that is heavy on “wow.” These types of investors will take risks, but only if they truly believe in you and/or your product or service.
Venture capitalists traditionally deal in large sums of money and seek better-than-average returns on their investments; less than 1% of proposals for venture capital are ever actually funded. Individual angels will make smaller investments in business startups, and although looking for good returns, are often less demanding.
Start at Home
Before you ask friends, family or financial institutions for money, be prepared to tap into your own savings or money market accounts, cash out your stocks, sell your boat, downsize your standard of living and/or take out a second mortgage.
If none of these seems a viable option, pull out your credit card(s). Many small businesses have succeeded by charging their way through the first year or two of operation, but it can be risky. If you go this route, use only cards with favorable interest rates, read all terms and conditions up front, monitor due dates and make every payment on time.
Another option to consider: store credit. Some retailers make it easy for you to furnish your office with no money down and no interest or payments for a year or more. Make that store’s gimmick work for you, but prepare for the day when the bill comes due; failure to meet the repayment terms generally results in heavy penalties and interest accrued from date of purchase. Ouch!
Borrow the Money You Need
Debt financing consists of borrowed dollars that must be repaid with interest, and the lender generally has no ownership control.
Whether from private or public sources, commercial loan approval is typically based on the business owner’s capacity to repay the loan as indicated by his/her past business experience, personal credit rating, collateral, industry conditions and the profitability of the business itself. You’ll make a better impression on a loan officer if you can present a fully developed business plan (see “Work the Plan”) that shows you’re serious about business ownership and you’ve done your homework.
BANKS AND CREDIT UNIONS are often cautious about making loans to business startups due to the high rate of failure associated with new businesses; you may have better luck securing funds from these sources once your business is established. Types of funding available from banks and credit unions include accounts receivable financing, inventory financing, unsecured lines of credit and commercial loans to satisfy special business needs. Some banks also may provide medium- and long-term loans to small businesses to increase working capital, purchase or lease equipment or finance real estate.
COMMERCIAL FINANCE COMPANIES are often willing to take higher risks than banks; they typically charge higher interest rates as a result. These firms customarily evaluate loan applications more on the strength of collateral than on a company’s track record or potential for profit.
THE U.S. SMALL BUSINESS ADMINISTRATION (SBA) offers no direct loans, other than for disaster assistance. Financial assistance to small firms from the SBA comes in the form of loans that are made by commercial banks or credit unions; in return, these institutions receive a federal-government guarantee for part of the loan. Applications for SBA loans are treated like any other commercial loan application: the primary deciding factor is an applicant’s ability to repay the loan. While good character, proven management ability, collateral and significant owner equity in a business are all important considerations, they carry less weight than demonstrated ability to pay the money back.
• CDC/504 Loan Long-term, fixed-rate financing to acquire fixed assets for expansion/modernization by for-profit businesses with a tangible net worth of less than $15 million and an average net income of $5 million or less after federal income taxes for the preceding two years; may be used for land, buildings, machinery and equipment.
• Microloan Funds are made available by the SBA to specially designated intermediary lenders that, in turn, make loans to eligible borrowers. The maximum loan amount is $50,000; however, the average microloan is about $13,000. May be used for working capital or purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment; may not be used to repay existing debts or purchase real estate.
Florida-Based Loan Programs
Microfinance Programs Entrepreneurs and small businesses in Florida with no more than 25 employees and gross annual revenues of up to $1.5 million have access to credit through two microfinance programs administered at the state level.
• Microfinance Loan Program Short-term loans of up to $50,000 are available through administrators selected by the Florida Department of Economic Opportunity; if selected to receive a loan, the borrower must participate in business training and technical assistance provided by the Florida SBDC Network.
• Microfinance Guarantee Program Enterprise Florida Inc. uses state funds to guarantee loans of between $50,000 and $250,000 made by private lenders to entrepreneurs and small businesses in Florida; guarantees cannot exceed 50% of the total loan amount.
For additional information and to apply for either of these programs, www.floridajobs.org/microfinanceprograms.
Know Your Score
If you are starting a business for the first time, you have no business credit history. So lenders and suppliers will use your personal credit score to determine your terms of credit. Know where you stand before you start “shopping” for funds by requesting a free copy of your credit report at annualcreditreport.com.