Fund It
Undercapitalization is among the top reasons many small businesses don’t make it beyond year one. Bottom line, you are going to need startup funds to put your business on firm financial ground, and if you don’t have a ready or large enough pool of cash to draw from, you’ll have to go looking for people and institutions that do. Here are a few suggestions.
Self Financing
Start Close to Home
Before you ask anyone — friends, family, 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 take out a second mortgage.
If none of these seems a viable option, you can always just pull out your credit card(s). While many small businesses have succeeded by charging their way through the first year or two of operation, it’s a risky way to go. If you do take 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 almost always results in heavy penalties and interest that is accrued from date of purchase.
Venture Capital
Enlist Help from Investors
Equity financing typically comes from an individual — often a family member or friend, even a group of investors — who expects some level of control in the business and/or a percentage of future profits.
Venture capital firms or private individual investors called “angels” are another source. Either 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, on the other hand, are generally wealthy individuals who are looking to support “hot” ideas and untapped investment opportunities. If you decide to pursue this option, be prepared to present a business plan that is heavy on the “wow” factor. These types of investors are willing to take risks, but only if they truly believe in you and/or the product/service you’re promoting.
Keep in mind that less than 1% of proposals for venture capital are ever actually funded. Venture capitalists traditionally deal in large sums of money and they seek better-than-average returns on their investments. Individual angels, on the other hand, will make smaller investments in business startups, and although looking for good returns, they are often less demanding. The Florida Venture Forum website has more info: www.flventure.org.
Commercial Loans
Borrow the Money You Need
Debt financing consists of borrowed dollars that must be repaid with interest, but generally does not give the lender any 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 or her past business experience, personal credit rating, collateral, industry conditions and the profitability of the business itself. You’ll have a better chance of making a good impression on a loan officer if you can present a fully developed business plan that shows you’re serious about business ownership and you’ve done your homework before taking the plunge.
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 on their loans 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.
7(A) Loan
For businesses involved in exporting to foreign countries or operating in small communities and rural areas, and for other very specific purposes.
CDC/504 Loan
Long-term, fixed-rate financing to acquire fixed assets for expansion or 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. The money may be used for land, buildings, machinery and equipment.
Microloan
The SBA makes funds available to specially designated intermediary lenders, which, in turn, make small, short-term loans to eligible borrowers. The maximum loan amount is $50,000; however, the average microloan is about $13,000. Microloans may be used for working capital and to purchase inventory, supplies, furniture, fixtures and machinery or equipment. Proceeds from a microloan may not be used to pay existing debts or to purchase real estate.
Florida 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 Small Business Development Center 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, visit www.floridajobs.org/microfinanceprograms.
Find out if you’re a good candidate for a commercial loan by rating yourself and your business against the 11 questions on our self-assessment checklist at FloridaSmallBusiness.com/TryIt.
Crowdfunding
Raising Capital Outside the Box
The growing popularity of crowdfunding as a way to underwrite small business growth was triggered by passage of the federal JOBS (short for Jumpstart Our Business Startups) Act in 2012. In a nutshell, this act allows private companies to solicit investors on the Web and opens the door for anyone, accredited and unaccredited investors alike, to become shareholders. The SEC is expected to issue formal rules for exactly how investment crowdfunding will work in October 2015. In the meantime, however, several platforms are already up and running online.
Should you consider investment crowdfunding? Maybe, maybe not. But at the very least, you should investigate the possibility and take a look at sites like Crowdfunder, EquityNet and AngelList for more information.
Grants
Money Not Easily Obtained
Little if any federal grant money is available to launch a for-profit small business. However, some small businesses engaged in scientific research and development (R&D) may qualify for federal grants under the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs if their projects meet federal R&D objectives and have high potential for commercialization. To learn more about these programs, visit www.SBIR.gov.
Some business grants may be available through state and local programs, nonprofit organizations or other groups. For example, states may provide grants for such wide-ranging programs as expanding child care centers, creating energy efficient technology and developing marketing campaigns for tourism. Be aware, however, that grants do not necessarily represent “free” money; many require the recipient to match funds or combine the grant with other forms of financing such as a commercial loan. For information about grants available in Florida, visit www.florida.grantwatch.com.
How Bankers Look at Borrowers: 5 Key Points
Borrowing money is a common way to fund a small business, but actually getting a loan may not be easy. Before making a loan request, consider how bankers evaluate loan eligibility and adjust your game plan accordingly:
1) Capacity to repay. A banker wants to know up front that you have the ability to pay your loan back, so come to your first meeting armed with proof: an analysis of anticipated cash flow and a description of collateral that could be used as a secondary repayment source.
2) Good credit history. Request a free copy of your credit report at www.annualcreditreport.com, then look it over carefully for mistakes and potential “red flags” before heading to the bank. A missed payment or a period of bad credit due to a medical crisis or other life-altering event won’t necessarily disqualify you from obtaining a loan; attaching a written explanation of the situation to your credit report could help your case.
3) Equity in your business. Equity can be built up through retained earnings or the injection of cash from owners/investors. Banks typically want to see that the total liabilities of a business are no more than four times the amount of equity. Don’t make the mistake of thinking you can obtain a loan to cover 100% of your financing needs; you will have to put some of your own money into this venture.
4) Collateral. Defined as personal and business assets that can be sold to pay back the loan if necessary. If you are just starting out and have no collateral, you will probably need a co-signer who has collateral to pledge.
5) Experience. Bankers do not look fondly on loan applicants who want to open businesses for which they have no experience, unless they can demonstrate that they intend to hire people who know the business or take on a partner with appropriate experience. If you do not have personal experience, get some. Before you apply for funding, work in the business first and take a few entrepreneurial training classes.