David
12-21-2004, 01:52 AM
Financing Your Start-Up ~Tips on Acquiring Capital for Your Business
By HBM
If you’ve come to the realization that your personal assets (i.e. checking account, savings account, or stock portfolio) aren’t going to be enough to finance your business, it’s time to look around for some additional capital.
As a entrepreneur, you can tap into many of the same funding sources considered by other small businesses. You just need to know how and where to look. Here are some of your options for securing capital:
Your Personal Bank
A first stop in any search for capital should be at your personal bank. Although bank requirements are more conservative and stringent than other funding sources, you’ll increase your chances of acquiring a loan if you have a good credit history and can prove that you are a worthwhile investment.
Bankers, like any potential funding source, want to know three things: how much money you want, how you will use the money, and how you will repay it. Provide them with a business plan that answers these questions and clearly state your goals and how you plan to attain them. Banks typically like to work with business owners that cover at least one-third to one-half of the financing.
Banks offer short-term or long-term loans. The short-term loan covers 6 months to one year, while the long-term loan covers longer time periods. Although the long-term loan accrues a higher rate of interest than the short-term loan, both types of loans have reasonable rates of interest, because they are determined by economic indicators.
Once you are approved for a loan, the bank will provide you money in either a lump sum or in a revolving line of credit. To back up loans, banks may "secure" a loan with a hard asset, such as your home. For businesses, banks usually require that the business owner provide a "personal guarantee." This is a legal document that makes the signer liable for business debts.
If your bank turns your loan request down, be sure to ask your banker for advice on how to improve your odds for future loans and to steer potential investors to you. Because of their close relationship with local businesses, most bankers know of investors who might be more open to funding your home business.
Loan Brokers
For a fee (usually up-front) a loan broker will take your business plan and circulate it among known investors and lenders, talking up the benefits of investing in your home business venture. Be careful, as not all loan brokers guarantee a loan. Before you pay up-front money or retainer fees, investigate the loan broker’s success rate and get referrals from others who have used his or her services.
Small Business Investment Company
Another source of capital is a Small Business Investment Company (SBIC). These business entities exist for the sole purpose of lending money to businesses. Many of them trade their investment for a percentage of the company they help capitalize, in effect, becoming a partner.
“Plastic”
There is probably not a successful entrepreneur who has not at one time or another tapped into his or her credit cards to help finance business start-up and expansion. Credit cards can provide business owners with instant financing. As opposed to waiting out the lengthy loan approval process, you can often begin using your credit card the day you apply for it. Almost anyone with a reasonable credit history can obtain a card.
Financing with credit cards, however, can be disadvantageous. The price you pay for this easy access is often a relatively high rate of interest, which can double that of a business loan secured through a bank. If you use your credit cards responsibly, though, you will be able to maximize cash flow and bridge funding gaps. Here are some quick tips on applying for and using your credit card(s) wisely:
· Shop around for the lowest interest rates (be aware of artificially low interest rates that increase rapidly after a three to six month start?up period).
· Use a separate credit card for business expenses.
· Limit credit card use to financing business activities to be repaid within 30 to 60 days.
· Always make payments well above the "Minimum Payment" amount.
· If your credit card balance gets too high, consider transferring the balance to a different card that accrues a lower rate of interest.
Family, Friends and Close Acquaintances
Another source of capital is your immediate circle of family, friends and close acquaintances. Familiarity and family ties can often break through the cold analysis that a "professional" outside investor will give a business. Even though you count on those ties that bind to be the main reason you get capital, still pitch your business in a professional manner. Show your friends and family why investing in you and your business is a wise decision for them to make.
Business Partners
A partner, used as a funding source, is really an investor with a 50 percent ownership interest. The advantage of forming a partnership goes beyond increasing the funding base for your business. A partner can also add valuable skills and creative insight to your business operation.
Private Investors
Private investors, or venture capitalists, are a timeless source for raising money. They have one guiding principle: Use their money to make them more money. They look at the high-risk business opportunities that banks shy away from. And whereas a bank just wants interest in exchange for their money, investors usually request both interest and part ownership.
To attract an investor's money, you have to be persuasive and offer them the opportunity to make a better than average rate of return. Your business and revenue projections must be supported with facts, figures and marketing research.
To locate investors, network with professional and personal contacts. Check the business classified sections of local and national newspapers. Also use the Internet to search for potential investors, but be careful, as it is difficult to verify the credibility of investors who respond online.
Investor Representatives
Also known as a financial consultant, an investor representative will "rep" your plan to potential investors. An investor rep use his or her extensive list of contacts to find a match for your financial needs. As a "headhunter" for money, an investor rep receives a "finders" fee, usually five percent. Although most of the fees are paid from dollars actually raised, you may pay for an investor rep's travel and out-of-pocket expenses.
Government Grant Money
All levels of government, especially the federal government, have funds available for start-up businesses. Most government funding programs are designed to foster economic development, which benefits the greater community. Although not widespread, grant money is often awarded for certain types of business endeavors. These include: (1) businesses that develop a service that benefits the public, and (2) businesses that develop a product or service needed by the government.
Restrictions and terms for awarding state and local government funds can differ. A good reference point for state and local government programs is your local chamber of commerce or library. Also, check to see if your state government has a “clearinghouse” that compiles information about grants.
Small Business Administration
If you are unable to raise money through a bank, but have a good business plan and are creditworthy, the Small Business Administration (SBA) may be able to help. A federal government institution, the SBA loans money to small businesses, including your type of business.
The SBA has a variety of other programs, including contract loan programs, disaster loan programs, and programs to serve disabled veterans, Vietnam veterans, low?income people, and other disadvantaged groups. To find out more about the SBA and their latest programs, visit www.sba.gov.
Professional Acquaintances and Contacts
As a business owner, you have many professional acquaintances and contacts that could become sources of investment capital (for example, your attorney and tax accountant). They may also have their own professional contacts that seek out investment opportunities.
Certain types of professionals are always on the look?out for ways to invest their surplus money. Often they join investment groups to pool resources. Give a copy of your business plan and explain your ideas to contacts who are “known” investors.
Related Businesses in Your Industry
It may be possible to persuade principals of other businesses in your industry to invest in your business. Consider those businesses that would especially benefit by your presence in the marketplace. These companies are likely to be the ones that would supply your home business with products or services, or that would benefit from your products or services.
Vendors
Most businesses rely on vendors who provide goods or services for their business needs. Vendors can provide the equivalence of revenue sources by extending credit on those goods or services. Terms can vary from 30 to 60 days up to six months (the length of time of a short term bank loan!).
After acquiring the necessary capital for your business, spend your dollars carefully and within your budget. Make sure that every purchase will help you profit in the long term and enable you to repay your funding sources on time. HBM
By HBM
If you’ve come to the realization that your personal assets (i.e. checking account, savings account, or stock portfolio) aren’t going to be enough to finance your business, it’s time to look around for some additional capital.
As a entrepreneur, you can tap into many of the same funding sources considered by other small businesses. You just need to know how and where to look. Here are some of your options for securing capital:
Your Personal Bank
A first stop in any search for capital should be at your personal bank. Although bank requirements are more conservative and stringent than other funding sources, you’ll increase your chances of acquiring a loan if you have a good credit history and can prove that you are a worthwhile investment.
Bankers, like any potential funding source, want to know three things: how much money you want, how you will use the money, and how you will repay it. Provide them with a business plan that answers these questions and clearly state your goals and how you plan to attain them. Banks typically like to work with business owners that cover at least one-third to one-half of the financing.
Banks offer short-term or long-term loans. The short-term loan covers 6 months to one year, while the long-term loan covers longer time periods. Although the long-term loan accrues a higher rate of interest than the short-term loan, both types of loans have reasonable rates of interest, because they are determined by economic indicators.
Once you are approved for a loan, the bank will provide you money in either a lump sum or in a revolving line of credit. To back up loans, banks may "secure" a loan with a hard asset, such as your home. For businesses, banks usually require that the business owner provide a "personal guarantee." This is a legal document that makes the signer liable for business debts.
If your bank turns your loan request down, be sure to ask your banker for advice on how to improve your odds for future loans and to steer potential investors to you. Because of their close relationship with local businesses, most bankers know of investors who might be more open to funding your home business.
Loan Brokers
For a fee (usually up-front) a loan broker will take your business plan and circulate it among known investors and lenders, talking up the benefits of investing in your home business venture. Be careful, as not all loan brokers guarantee a loan. Before you pay up-front money or retainer fees, investigate the loan broker’s success rate and get referrals from others who have used his or her services.
Small Business Investment Company
Another source of capital is a Small Business Investment Company (SBIC). These business entities exist for the sole purpose of lending money to businesses. Many of them trade their investment for a percentage of the company they help capitalize, in effect, becoming a partner.
“Plastic”
There is probably not a successful entrepreneur who has not at one time or another tapped into his or her credit cards to help finance business start-up and expansion. Credit cards can provide business owners with instant financing. As opposed to waiting out the lengthy loan approval process, you can often begin using your credit card the day you apply for it. Almost anyone with a reasonable credit history can obtain a card.
Financing with credit cards, however, can be disadvantageous. The price you pay for this easy access is often a relatively high rate of interest, which can double that of a business loan secured through a bank. If you use your credit cards responsibly, though, you will be able to maximize cash flow and bridge funding gaps. Here are some quick tips on applying for and using your credit card(s) wisely:
· Shop around for the lowest interest rates (be aware of artificially low interest rates that increase rapidly after a three to six month start?up period).
· Use a separate credit card for business expenses.
· Limit credit card use to financing business activities to be repaid within 30 to 60 days.
· Always make payments well above the "Minimum Payment" amount.
· If your credit card balance gets too high, consider transferring the balance to a different card that accrues a lower rate of interest.
Family, Friends and Close Acquaintances
Another source of capital is your immediate circle of family, friends and close acquaintances. Familiarity and family ties can often break through the cold analysis that a "professional" outside investor will give a business. Even though you count on those ties that bind to be the main reason you get capital, still pitch your business in a professional manner. Show your friends and family why investing in you and your business is a wise decision for them to make.
Business Partners
A partner, used as a funding source, is really an investor with a 50 percent ownership interest. The advantage of forming a partnership goes beyond increasing the funding base for your business. A partner can also add valuable skills and creative insight to your business operation.
Private Investors
Private investors, or venture capitalists, are a timeless source for raising money. They have one guiding principle: Use their money to make them more money. They look at the high-risk business opportunities that banks shy away from. And whereas a bank just wants interest in exchange for their money, investors usually request both interest and part ownership.
To attract an investor's money, you have to be persuasive and offer them the opportunity to make a better than average rate of return. Your business and revenue projections must be supported with facts, figures and marketing research.
To locate investors, network with professional and personal contacts. Check the business classified sections of local and national newspapers. Also use the Internet to search for potential investors, but be careful, as it is difficult to verify the credibility of investors who respond online.
Investor Representatives
Also known as a financial consultant, an investor representative will "rep" your plan to potential investors. An investor rep use his or her extensive list of contacts to find a match for your financial needs. As a "headhunter" for money, an investor rep receives a "finders" fee, usually five percent. Although most of the fees are paid from dollars actually raised, you may pay for an investor rep's travel and out-of-pocket expenses.
Government Grant Money
All levels of government, especially the federal government, have funds available for start-up businesses. Most government funding programs are designed to foster economic development, which benefits the greater community. Although not widespread, grant money is often awarded for certain types of business endeavors. These include: (1) businesses that develop a service that benefits the public, and (2) businesses that develop a product or service needed by the government.
Restrictions and terms for awarding state and local government funds can differ. A good reference point for state and local government programs is your local chamber of commerce or library. Also, check to see if your state government has a “clearinghouse” that compiles information about grants.
Small Business Administration
If you are unable to raise money through a bank, but have a good business plan and are creditworthy, the Small Business Administration (SBA) may be able to help. A federal government institution, the SBA loans money to small businesses, including your type of business.
The SBA has a variety of other programs, including contract loan programs, disaster loan programs, and programs to serve disabled veterans, Vietnam veterans, low?income people, and other disadvantaged groups. To find out more about the SBA and their latest programs, visit www.sba.gov.
Professional Acquaintances and Contacts
As a business owner, you have many professional acquaintances and contacts that could become sources of investment capital (for example, your attorney and tax accountant). They may also have their own professional contacts that seek out investment opportunities.
Certain types of professionals are always on the look?out for ways to invest their surplus money. Often they join investment groups to pool resources. Give a copy of your business plan and explain your ideas to contacts who are “known” investors.
Related Businesses in Your Industry
It may be possible to persuade principals of other businesses in your industry to invest in your business. Consider those businesses that would especially benefit by your presence in the marketplace. These companies are likely to be the ones that would supply your home business with products or services, or that would benefit from your products or services.
Vendors
Most businesses rely on vendors who provide goods or services for their business needs. Vendors can provide the equivalence of revenue sources by extending credit on those goods or services. Terms can vary from 30 to 60 days up to six months (the length of time of a short term bank loan!).
After acquiring the necessary capital for your business, spend your dollars carefully and within your budget. Make sure that every purchase will help you profit in the long term and enable you to repay your funding sources on time. HBM