Financing Your Business
Date: Wednesday, September 15, 2004 @ 12:00 AM EDT
Topic: Finance and Capital
by Brett Krkosska
Finding the capital you
need to finance your business can be a confusing and complicated process. Many great ideas
stumble at this stage of business building.
Yet, moving through this stage breathes life into your business - giving it forward
momentum like a roller coaster barreling down the first big hill. Finding money is 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, as generalities
are recipes for disaster. 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 you
pay back the money?
You must have adequate cash flow from your business to repay the money to your source.
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 statements for your business. You
need to show sufficient cash flow in your business for repayment. You do this with
information as found in an income statement, a balance sheet, and a projected cash flow
statement.
SOURCES OF MONEY
Here are some options for funding your small business:
Credit Cards
One form of personal debt you should avoid is cash advances on your credit card. 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.
Friends and Family
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. Just make sure all parties are aware of any risks. You
don't want to alienate your family if the business falls on hard times and you have
trouble repaying the loan.
Personal Savings
You can 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, avoid large
purchases -- 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.
Line of Credit
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.
Bank Loan
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 some banks prefer
to separate personal equity from business debt.-
- Venture Capital
People with lots of money love to make lots more money. Your job is to convince venture
capital providers that you and your business can help them make lots more money.
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 capital providers want to be sure their investment is sound. They generally do
this by taking ownership over a pretty big part of the company, and often require control
of major portions of the business. This is so they can look after their investment.
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!
A few sites that help businesses and capital providers meet are vCapital.com,
BusinessFinance.com, and vFinance.com.
Angels
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.
Moving outside of your local area, you can begin a sweeping search for private investors
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. You can find your local office using this online locator:
http://www.sba.gov/regions/states.html
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 American Economic Development
Council for a list of organizations in your area: http://www.aedc.org/
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, or your local municipality.
Your Future Customers
Your future customers may be a source of money. This is a less conventional method, and
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 perseverance. Get your name and idea out
there in the real world. Start talking to people about your intent and become a player.
Have your business plan ready, be aggressive, and you can get the money you need.
ABOUT THE AUTHOR:
Brett Krkosska provides how-to advice on family and home-based work issues. Get start-up
guidance, business ideas and inspiration at http://HomeBizTools.com. Become a subscriber for a fresh and
original perspective on today's business issues: mailto:enews@homebiztools.com
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