Money has a role to play in small business success, but it’s probably not the one you think. Having a lot of money at the outset doesn’t guarantee continued good fortune for your enterprise any more than running out of it will cause your firm to fail. As a small business owner, you should know that what matters about money is not the total amount you have, but how you choose to acquire and handle it. Here are some suggestions:
Before you ask anyone — friends, family or financial institutions — for money, tap into your own private stash: withdraw funds from savings, cash out your stocks, sell your boat, downsize your standard of living and/or take out a second mortgage.
If none of these is 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. 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: store credit. Furnish your office by taking advantage of store gimmicks that allow you to make purchases with no money down and no interest or payments for a year or more. Just be sure to 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
Commercial loans, whether from a private or public source, are approved based on the business owner’s capacity to repay as indicated by his/her past business experience, personal credit rating, collateral, industry conditions and the profitability of the business itself. You will improve your chances of securing a loan if you can present a fully developed business plan that shows you are serious about business ownership and you have done your homework. See tips for preparing a business plan.
Commercial Banks are often cautious about making loans to business startups due to the high rate of new business failure; you may have better luck securing funds from a bank once your business is established. Types of funding available 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 for businesses to increase working capital, purchase or lease equipment or finance real estate. In choosing a bank for your business, don’t be swayed by national name recognition. Look for a bank where you will feel comfortable and can establish a personal relationship. Small businesses often find locally-owned and -operated banks most receptive to their needs.
Credit Unions offer many of the same services as banks, including small business loans, but as nonprofit institutions, they tend to have fewer fees, higher interest rates on deposits, lower rates on loans and greater emphasis on personal and localized customer service.
Commercial Finance Companies are often willing to take higher risks than banks and, consequently, they typically charge higher interest rates. 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. 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 long- or short-term working capital needs, inventory and equipment purchases, expansion/renovation, starting a business or to refinance existing debt under certain specific conditions.
• 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 are available to entrepreneurs and small businesses in Florida with no more than 25 employees and gross annual revenues of up to $1.5 million through two microfinance programs that are 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 between $50,000 and $250,000 made by eligible lenders to small and micro businesses in Florida; guarantees cannot exceed 50% of the total loan amount and are limited to 36 months.
For additional information and to apply for either of these programs, www.floridajobs.org/microfinanceprograms.
Tap into Targeted Funding Opportunities
If you are black, Hispanic, a female or a U.S. veteran, your business may be eligible for one of the following specialized funding programs:
Minorities The Black Business Loan Program provides loans, loan guarantees and/or investments through loan administrators to black business enterprises that cannot otherwise obtain capital through conventional lending institutions. For additional information, visit www.floridajobs.org/BBLP. In addition, Black Business Investment Corporations throughout Florida stand ready to facilitate access to capital for black business owners. Hispanic business owners may find funding information pertinent to their needs through Prospera (formerly Hispanic Business Initiative Fund Florida) at www.prosperausa.org.
Women No government loan programs exist exclusively for women business owners; however, experience has shown that SBA loans are three to five times more likely to go to women than non-SBA loans. SBA financing options include 7(a) and CDC/504 loans as well as microloans for small-scale financing. On the local level, Women’s Business Centers can provide assistance in applying for loans and also may provide access to alternative capital financing programs.
Veterans The U.S. Department of Veterans Affairs Office of Small & Disadvantaged Business Utilization offers a wealth of information on small business financing specifically geared to veterans. Its Veteran Entrepreneur Portal provides easy access to federal services and best-practices information about starting, growing and funding a business. For more information, visit www.va.gov/osdbu/entrepreneur/. In addition, the SBA website features an entire section devoted to business resources for veteran entrepreneurs at www.sba.gov/content/veteran-service-disabled-veteran-owned.
Seek Venture Capital
Venture capital firms and private individual investors called “angels” may be willing to make money available for your venture if they see potential. In return, they will likely expect some level of control in your business and/or a percentage of future profits.
Venture capital firms are often controlled by banks, insurance companies and large corporations; angels, on the other hand, are generally wealthy individuals 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, they may be less demanding.
Think Outside the Box
Grants Almost no federal grant money is available to launch for-profit small businesses. However, some businesses engaged in scientific research and development (R&D) may qualify for federal grants under the Small Business Innovation Research and the Small Business Technology Transfer programs if their projects meet federal R&D objectives and have high potential for commercialization. To learn more, visit www.SBIR.gov. SBA has authority to make grants to non-profit and educational organizations in many of its counseling and training programs, but does not make grants to small businesses. Announcements of the counseling and training grants appear on www.grants.gov.
Some business grants may be available through state and local programs, nonprofit organizations or other groups. These 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.floritdagranwatch.com.
Crowdfunding Crowdfunding is a way for private companies to solicit investors on the web and opens the door for anyone to become shareholders. As a result, the privilege of investing in startups, which was once available only to accredited investors, is now open to all.
SEC rules lay out the specifics of crowdfunding, including the paperwork required and limits on how much money an issuer can raise. By all means, investigate this potential funding source, but look to specialists at your local Florida SBDC office and elsewhere for guidance before committing to it.
Beware of Grant Scams
ALL government grants involve an application process, but never an application fee. And no legitimate federal agency will ever call to request a processing fee for a grant you’ve already been awarded or to pay for a list of grant-making institutions. The only official access point for all federal grant-making agencies is www.grants.gov. Anything else is a scam.