Fund It: Get financing for your start-up
If you’ve been working the program so far — you’ve chosen a name and a location, you’ve begun applying for permits and licenses, you’re working on a business plan, etc., etc. — you may be scratching your head and wondering what to do about the elephant that remains in this room. Money. Wonder no more. The time has come to ask yourself: “How am I going to pay for this?” and consider the following options.
You can self-finance.
Before you seek money from someone else, use your own. Withdraw funds from savings, cash out your stocks, sell your boat, downsize your standard of living, take out a second mortgage. If these aren’t viable options, pull out your credit card(s). Many small businesses have charged their way through the first year or two of operation, but beware. Only use cards with favorable interest rates, read the fine print up front and make every payment on time.
You can borrow the money you need.
Commercial loans, whether from private or public sources, are approved based on the business owner’s capacity to repay as indicated by factors such as past business experience, personal credit rating and collateral. A fully developed business plan that makes a strong case for potential profitability can sway the odds of securing a loan in your favor.
commercial banks are generally cautious about financing business startups due to the high rate of new business failure; you may have better luck securing a bank loan once your business is established. Types of available funding vary from bank to bank. Small businesses may find locally-owned and -operated banks more receptive to their needs than those with national name recognition.
CREDIT UNIONS offer many of the same services as banks, including small business loans, but as nonprofit institutions, they tend to put more emphasis on personal service and feature higher interest rates on deposits and lower rates on loans.
COMMERCIAL FINANCE COMPANIES are often willing to take higher risks than banks and typically charge higher interest rates as a result. These firms customarily evaluate loan applications more on strength of collateral than a company’s track record or profit potential.
THE U.S. SMALL BUSINESS ADMINISTRATION (SBA) offers no direct loans, other than for disaster assistance. SBA financial assistance to small firms takes the form of loans made by commercial banks or credit unions which, in return, receive a federal-government guarantee for part of the loan. Applications for SBA loans are treated like any other commercial loan application; demonstrated ability to pay the money back is the primary consideration.
• 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 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; the average 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 FINANCIAL SUPPORT PROGRAMS available to entrepreneurs and small businesses include:
• Microfinance Loan Program Short-term loans of up to $50,000 are available to businesses with no more than 25 employees and gross annual revenues of up to $1.5 million 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.
• The Florida Opportunity Fund Working with lenders and other outside organizations Enterprise Florida helps startup and early-stage small businesses access capital through either a state-run venture capital fund or a fund of funds that invests in other venture capital funds that, in turn, invest in individual businesses. Resources and available talent help determine the vehicle.
For additional information, visit www.floridajobs.org/microfinanceprograms.
What's the Score?
Since first-time business owners have no business credit history, lenders and suppliers must rely on personal credit scores to determine eligibility for financing. So before you submit a loan application, know your score by requesting a free copy of your credit report at www.annualcreditreport.com.
3 Ways to Improve Your Odds of Securing a Loan
1. Prove you can pay the money back. Provide a written analysis of anticipated cash flow and a description of any collateral that could be used as secondary repayment.
2. Present with a good track record. Know your credit score and read your complete credit report. Correct all mistakes before meeting with a banker and be prepared to explain any potential “red flags.”
3. Put some of your own money into the business. Don’t expect a loan to cover 100% of your financing needs; be willing to invest money yourself. Because if you don’t believe enough in your business to lay some money down, who else will?
You can leverage your own uniqueness.
If you are black, Hispanic, a female or a U.S. veteran, your business may be eligible for targeted financing:
MINORITIES The Black Business Loan Program (www.floridajobs.org/BBLP) provides loans, loan guarantees and/or investments through loan administrators to black business enterprises that cannot otherwise obtain capital through conventional lending institutions. 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 and 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 (www.va.gov/osdbu/) offers information on small business financing specifically geared to veterans. Click on its Veteran Entrepreneur Portal for easy access to federal services and best-practices information about starting, growing and funding a business. In addition, the SBA website has an entire section devoted to business resources for veteran entrepreneurs at www.sba.gov/business-guide/grow-your-business/veteran-owned-businesses.
You can obtain a grant.
Almost no federal grant money is available to launch for-profit small businesses. However, some businesses engaged in scientific 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 objectives and have high potential for commercialization. For details, visit www.SBIR.gov. For information about grants available through state and local programs and nonprofit organizations in Florida, visit www.floridagrantwatch.com.
You can attract a private investor.
Venture capital firms or private individuals called “angels” may be willing to invest in your venture if they see potential. They will expect something in return — some level of control and/or a percentage of future profits. Venture capital firms are often controlled by banks, insurance companies and large corporations; angels are usually wealthy individuals looking to support “hot” ideas and untapped investment opportunities. Since these types of investors will take risks only if they truly believe in you and/or your product or service, a business plan heavy on “wow” is essential. Keep in mind, however, that less than 1% of proposals for venture capital are ever actually funded.
See a list of Florida venture capital firms or visit Florida Venture Forum at www.flventure.org for more information.
Enterprise Florida: Financial Support
Enterprise Florida Inc. (EFI) partners with lenders and other outside organizations to help small businesses access capital through the following program:
• The Florida Opportunity Fund provides venture capital for startup and early-stage businesses in two forms: a state-run venture capital fund, which may include other, private investors, that invests directly in businesses; and a fund of funds that invests in other venture capital funds that, in turn, invest in individual businesses. The state’s decision on which form to use depends on many factors, including resources and available talent.
You can try crowdfunding. The idea 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, which allows private companies to solicit investors on the web and opens the door for anyone to become a shareholder. SEC rules lay out the specifics, including the paperwork required and limits on how much money an issuer can raise. If crowdfunding appeals to you, look to specialists at your local Florida SBDC office for advice.