September 30, 2014

Start-Up Guide

Financing Your Business

A STRONG FINANCIAL BASE is important to the success of a new or expanding business. Plan your cash flow carefully.

| 6/1/2007

Growing businesses often can’t rely only on internal cash flow to fund expansion, but it’s often hard to find financing. Before tapping that credit card or asking Uncle Joe for a loan to tide you over, put together a financial plan. Write down the specifics of how much you’ll need, how you’ll use the cash, when you’ll pay it off, what you’ll do if something doesn’t go according to plan and whether you are willing to give up a stake in the business in return for capital.

»The Basics

A startup or early-stage company has little chance of getting a significant bank loan. SBA startup loans, for example, are typically limited to $10,000 because lenders aren’t willing to put their money on the line unless a business has a proven track record. Where will the money come from? A few ideas:

  • Savings
    If you aren’t confident enough to put your savings on the line, no one else will likely invest in your venture either. That means cashing in your stocks, selling the boat and even taking a loan from your retirement account, if necessary.
  • Credit cards
    While financial advisers wince at the idea of using plastic to fund your business, the truth is that many small companies charge their way through the first year or two of operation. If you use this option, get a card or several cards with low interest rates and read all the terms and conditions carefully. Watch due dates and make every payment on time.
  • Store credit
    Many retailers make it easy to furnish your office with no money down, no interest or payments for a year. Make that store’s gimmick work for you, but prepare for the day when the bill comes due.

 

»The Next Steps

After you’ve tapped the “easy” money, try these sources of capital.

  • Home equity
    Putting your home on the line may sound risky, but it is often the easiest way to get tens of thousands of dollars. There’s minimal paperwork and, with the dramatic increase in Florida home values over the past several years, often plenty of equity available. A home equity loan makes more sense in light of an SBA loan requirement that if the borrower has 20% equity in his or her home, it must be used as collateral for an SBA loan. So in many cases, the entrepreneur’s home would be pledged anyway to get the SBA loan, which requires more paperwork and
    often higher fees.
  • Investors
    There are no listings and few databases for private investors. To find them, look for groups that work with investors, or “angels,” such as the University of Central Florida Venture Lab. Talk with friends and business associates, industry insiders in your specific field and “true believers” in what you are doing. As an example, someone starting an environmental business might join the Sierra Club to meet and mingle with like-minded people with money.
  • Credit unions
    Some large credit unions are starting to do SBA lending. For the best success with a credit union, go to one where you have a personal account. If you aren’t already a credit union member, find one to join by using the online credit union locator at www.joinacu.org or check with the Florida Credit Union League, www.fcul.org. Membership in credit unions has become more open in recent years, although many workplace credit unions still restrict membership to employees.

SBA Lending Today

Raising capital has become more expensive for entrepreneurs since Congress changed the funding structure for U.S. Small Business Administration loans in 2004. Today, borrowers and lenders shoulder the entire cost of the program through increased fees. The federal government subsidy was eliminated in late 2004. For more information, click on sba.gov.

»7(a) Business Loans (up to $2 million)
The SBA’s 7(a) loan program offers loan amounts up to $2 million, with a maximum guarantee of $1.5 million.

This is the SBA’s primary loan program. The maximum loan amount is $2 million, with a maximum loan guarantee of $1.5 million. The maximum guarantee is 85% for loans of $150,000 or less; 75% for loans over $150,000. (A $2 million loan would have a loan guarantee of $1.5 million, or 75%.)

Fees are 2% of the guaranteed portion for loan amounts of $150,000 or less, 3% for loans from $150,000 to $700,000, and 3.5% for loans over $700,000. For loans over $1 million, an additional 0.25% guaranty fee will be charged for the portion greater than $1 million. An ongoing servicing fee of 0.55% applies to the guaranteed portion of the loan for loans approved on or after Oct. 1, 2006. Interest rates are negotiated with the lender, but are subject to SBA maximums, which are pegged to the Prime Rate.

Loan proceeds can be used for fixed assets, working capital, inventory, seasonal line of credit or, for compelling reasons, for debt repayment. Real estate may be financed for up to 25 years and working capital loans for seven years (with terms of 10 years in a select few cases). The maximum repayment for fixed assets other than real estate is the economic life of the asset, but in no cases longer than 25 years.

»SBAExpress (up to $350,000)

Lenders use their own forms and processes to approve loans in amounts up to $350,000, providing minimal paperwork to the SBA to obtain a maximum guarantee of 50%. Loan term varies.

Interest rates are tied to the Prime Rate, but are negotiated with the lender. For loans of $50,000 or less, lenders may charge up to 6.5% over Prime; for loans more than $50,000, the maximum rate is 4.5% above Prime.

»Community Express (up to $250,000)

This pilot program is available in geographic areas serving primarily low- to moderate-income entrepreneurs. Revolving lines of credit up to seven years are allowed. The maximum guarantee is 85% for loans of $150,000 or less; 75% for loans over $150,000. Collateral may not be required for loans up to $25,000. The program also includes technical and management assistance.

»504 Loan Program

This program uses fixed, long-term financing to finance fixed assets for for-profit businesses with less than $7.5 million in net worth and less than $2.5 million in after-tax profits. The money can be used for assets such as land, buildings, long-term machinery and equipment. Funds cannot be used for working capital or inventory. Typically a bank will loan 50% of the project’s cost, a Certified Development Company provides SBA-guaranteed funds for 40% of the total cost up to $4 million for small manufacturers (SBA limit is $2 million for non-manufacturers that meet public policy goals and $1.5 million for non-manufacturers that meet job creation or community development goals) and the remaining 10% comes from the owner’s down payment. Repayment is over 20 years for real estate, 10 years for equipment. Interest rates are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues.

Florida’s Certified Development Companies

Business Development Corporation of Northeast Florida
bdcjaxnfl.org

  • Jacksonville, (904) 279-085

Florida Business Development Corp.
fbdc.net

  • Lake Worth, (561) 433-0233
  • Orlando, (407) 352-2551
  • Jacksonville, (904) 296-8550
  • Miami, (305) 597-5225
  • Tampa, (813) 639-4214

Florida First Capital Finance Corp.
ffcfc.com

  • Fort Lauderdale/West Palm Beach, (561) 265-4210
  • Jacksonville, (904) 861-2270
  • Miami, (786) 845-0405
  • Orlando, (386) 232-7373
  • Pensacola, (850) 393-0496
  • Tallahassee, (888) 320-5504
  • Tampa/St. Petersburg, (813) 395-7601

Gulf Coast Business Finance
gulfcoastcdc.com

  • St. Petersburg, (800) 850-2504 or (727) 895-2504

Jacksonville Economic Development Corp.
jedco.net

  • Jacksonville, (904) 398-9411

Southwest Florida Regional Development Corp.
srdcorp.org

  • North Fort Myers, (239) 652-5588

Tampa Bay Economic Development Corp.
tedcoloans.com

  • Tampa, (813) 984-8105

Tags: Florida Small Business, Business Services

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