Finding the capital you need to finance your business can be a confusing and complicated process. It’s really just a matter of being informed and choosing the right path for money to enter the business.
There are several options available to you when searching for financing. Some methods of raising funds are less difficult than others, but all require some planning. Basic planning requires that you know the answer to these three questions:
- What will you use the money for?
You must know exactly where the money will be used. You must be specific. Carefully identify the areas where money should flow into your business.
- How much money do you need?
You should calculate your needs to carry you through initial startup and into your first several months of operation. It’s necessary to have a realistic picture of your needs. Many businesses fail because the money runs out before the business reaches profitability.
- How will pay back the money?
You must have adequate cash flow from your business to repay the money to your source. Use realistic financial projections to pinpoint your expected cash flow.
Prove Your Ability to Repay
Just as all currency has a front side and a back side, so too do most sources of financing. Any individual or institution that loans money with one hand has the other hand extended for repayment. So before asking for funds, make sure your fiscal projections and business integrity are soundly argued in a good business plan.
An integral part of a good business plan are financial projections for your business. You need to show sufficient cash flow in your business for repayment. You do this with financial information as found in an income statement, a balance sheet, and a projected cash flow statement.
Sources of Money For Your Business
Start-ups often find it easier to get money from individuals or groups of individuals, while companies who have a track record of success are more apt to find an audience with institutional lenders.That said, here are some options for funding your small business.
· Personal Debt
One form of personal debt is getting cash advances on your credit cards. It’s very tempting and very easy to get cash this way. If you do this you should pray. Pray with vigor. Then ask for forgiveness. This option is very expensive and extremely risky. Credit cards should only be used for short-term expenses, and not as a means to entirely fund a start-up business.
Borrowing from your friends and family, especially the rich ones, is a good way for new businesses to get money. It’s not uncommon for relatives to make low interest or no interest loans to family members. However, you risk alienating your family if the business falls on hard times and you have trouble repaying the loan.
Use your personal savings or assets that can be converted to cash. If your savings are already low, put off that vacation, drive your old car a bit longer, stop eating out — be thrifty in all areas and you can save faster for your business. Keep in mind that most lenders won’t finance 100 percent of your business, so you’ll need to invest some money yourself.
If you have good credit, you may be able secure a line of credit from your bank. This can be handy in providing you with a source of working capital in the opening round of your business. Using collateral, such as the equity in your home, you can approach your bank for a loan against your business. This may or may not be an option for you, since many banks prefer to separate personal equity from business debt.
· Venture Capital
Venture capital is out there. But, you must be able to show you’ve got a real winner. You must do it without fluff or a “come on, dream with me” embellishment. Therefore, you need a business plan. A good one that shows you’ve done your homework and know the “lay of the land.”
Venture Capitalists are looking for good investment vehicles. They generally want a pretty big part of the company and often take over major portions of the business.
Do they mess around with the little guy? On the whole, they don’t want to fool around with little investments and they are bully on companies that have high-growth potential. Gotta think big with these guys!
The VC’s are pretty tight-fisted when the economy is sluggish. That doesn’t mean you can’t find someone who loves your idea and is willing to finance it. But you’ve got to have a strong case and a spectacular presentation.
Here are a few good places to learn more about available venture capital.
An angel, or private investor, is a person looking for good investment vehicles. This person could be your next door neighbor, your dentist, or a local business owner. Overall, angels are not loan-makers, they are investors. As such, the degree of control and terms under which you receive seed money for your business will depend on the arrangement brokered between you and your angel.
The key to finding an angel in your area is networking. While you may not have an angel in your personal pool of contacts, by networking with others you can create a word of mouth campaign that reaches the ears of private investors.
You can begin the search for a private investor at BusinessFinance.com. They maintain a list of thousands of potential investors.
· SBA Microloans
The Small Business Administration may be helpful in connecting you with a Microloan. These loans are administered by non-profit organizations that want to foster economic development in your area. Contact your regional SBA office for information on this loan program.
· Grants for Women Business Owners
There are organizations that focus on helping women start or expand there business with grants or loans. The available grants are often narrowly targeted to a specific business model or discipline, but it’s worthwhile to see if you qualify in your business.
· Service Corps of Retired Executives (SCORE)
Retired executives from all walks in business provide personalized and free counseling to assist you in making the right decisions for your business. Take advantage of this free service for specific advice pertaining to your business and your financial needs.
· Small Business Investment Companies
The SBA or your local Chamber of Commerce may be aware of Small Business Investment Corporations operating in your area. These organizations are interested in reviving depressed portions of your community, bringing employment to places with high unemployment, or even helping certain minority groups. They will work with new businesses if you meet the criteria they expect. You can visit the Economic Development Administration for a list of organizations in your area.
· Business Incubators
Business Incubators help build new businesses. They can provide help in all phases of start-up, including funding. Investigate whether or not an incubator exists in your area with the SBA, Chamber of Commerce, local universities, and your local municipality.
· Your Future Customers
Your future customers may be a source of money. This is a less conventional method and isn’t right for all businesses. Your timing must be right to coordinate this type of deal. You simply take advance orders for your product and collect at the time of the order. If you take enough orders, you can search for a lending institution which makes loans against accounts receivable.
In the final analysis, the name of the game is networking. Get your name and idea out there in the real world. Start talking to people about your intent. Become a player in the ‘who ya know’ game. Get your business plan together, be aggressive, and you can get the money you need.
ABOUT THE AUTHOR
Brett Krkosska provides how-to advice on small business and home-based work issues. He is the founder of HomeBizTools and the publisher of Straight Talk, a syndicated column that offers a unique perspective on today’s business issues.