Finding The Money For Your Dream Business
By Janet Kramer, CPA

You’re ready to start your own business, you’ve written a tight business plan, you know exactly how much you need…but you don’t have enough money. Where can you get it? Following are suggestions for finding money.

Your Own Bank Account
First and foremost, you’ll have to invest a bit of capital yourself. Any lender or investor will want to see some risk-taking on your part. The key here is to be careful. You might already be quitting your job to take on this new venture, which is risky enough. On top of that, you don’t want to jeopardize your life savings. Choose an amount you’re comfortable losing – every cent of it, if necessary – and don’t go over that amount. Make sure the sum doesn’t represent more than 20% of your net worth. If you have a spouse or partner or someone you share money with, talk it over and make sure you’re both comfortable with the amount you’ve chosen.

Partner Up
You have the ideas, know-how, experience and connections, but alas, no cash.  Partner with someone who believes in and wants to invest in the business. Your partner can be a passive investor or an active participant, depending on the relationship you both prefer. Make everything clear from the beginning, put  your terms and expectations in writing, and draw up a legal agreement to protect both of your stakes.

Sell Shares In Your Company
Selling shares in your company is like partnering with a crowd of people.
Twenty investors equals twenty potential headaches. Most investors want one thing and one thing only: return on investment. This can come in the form of regular pay-outs (dividends or distributions) or by cashing out the stock. The moment you sell one share of stock to a friend, family member or casual investor, you lose some degree of control. If there’s any way to start the business more simply or to make it through a rough patch without giving up equity, choose that path instead.

Home Equity Lines Of Credit (HELOC)
HELOCs can be a great source for business financing. You’ll often find that interest rates are lower on home equity lines than traditional commercial loans, sometimes by two or three percentage points. The drawback (and it’s a huge one!) is that, if for some reason, you can’t pay back the loan, you risk losing your home as well as your business.

Microlenders are firms who specialize in business loans ranging from $500 to $50,000, and they can offer not only money, but also business counseling.  They’re usually affiliated with non-profits or government-sponsored organizations, and they might be looking for you as actively as you’re looking for them. They often have quotas to meet as to how much money they need to place in their community, so they’re eager to work with budding entrepreneurs and will often take on risky loans that more traditional lenders avoid. Search for them under the term, “microlender” on the Internet.

Commercial Loans
Traditional loans from banks tend to fall into one of two categories, long-term or short-term. Long-term are typically used to purchase assets, like equipment, buildings, land, or machinery, and the assets are used as collateral for the loan. Short-term are generally used for the day-to-day operations of the business, such as purchasing inventory and paying wages, and the repayment takes place in less than a year. When you’re shopping around for a loan, the key questions to pose are: duration of the loan, interest rate, monthly payment, and fees. More than likely, you’ll be required to personally guarantee the loan, even if you’ve incorporated your business.

Bankers like to evaluate potential borrowers using the four C’s of lending:
•credit history – is your credit history and/or the business’s credit history
good, bad or unknown;
•collateral – what can you and/or the business put up as collateral, tangible assets the bank can seize if the loan goes sour;
•cash flow – will the business be able to generate enough revenue to pay all of its expenses, plus pay back the interest and principal on the loan.
•character – do you have the integrity and drive to pay the loan back, no
matter what.

When you’re searching for a loan, remember that banks are in the business of lending money and getting it back. They’ll often say “yes” to horrible business ideas (if the borrower has impeccable credit and plenty of assets) and “no” to great business ideas (because the borrower has shaky credit and no assets). Don’t let their judgments make or break your business dream.

Working Lines Of Credit
A line of credit, from a traditional bank, can come in handy. Lines range from 90 days to several years, interest rates float with the market, and you pay interest only on the outstanding balance. Even if you don’t think you’ll need the money, it’s a good idea to take out a line of credit and to begin to establish business credit from the beginning days of your operation. Collateral for the loans is often the inventory in your business or your accounts receivable.

Credit Cards
A revolving credit charge card can function as an alternative to a working line of credit. The largest card issuers—VISA, American Express, and MasterCard—have small business card programs. As a source for working capital, revolving credit cards offer a hassle-free, quick source for limited funds, but their convenience can be deadly. For every story you read about an entrepreneur who financed his dream on credit cards, there are thousands of others have gone down in the flames of bankruptcy.

Equipment Leasing
If you need to purchase expensive equipment, consider leasing it rather than paying for it outright. Oftentimes, equipment manufacturers will provide leases or be able to suggest a reputable, independent leasing company.

Vendor Financing
When you’re starting out or well on your way, you can look to your vendors to provide “financing” in the form of more lenient payment terms. For instance, if you expect your business to purchase $5,000 worth of supplies per month, and you can negotiate terms of net 90 instead of net 30, you will have, in essence, set up a mini, $10,000 line of credit, at no interest, at your suppliers’ expense.

Venture Capital Financing
While venture capitalists figure prominently in the media, this type of
financing isn’t available to most small business owners. Venture capital
usually comes from institutional risk takers, who can be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most VCs specialize in a few, closely-related industries and tend to invest $1 million or more per business. They receive ownership in the business in  exchange for the money they invest, and they rarely back start-ups. They prefer to see some type of track record, then they’ll jump in and propel the business to the next level with their investment and active involvement.

The above suggestions for finding money can be used alone or in combination with one another. If, by combining them, you still can’t secure the amount of money you need, go back, look at your start-up costs, and trim everywhere you can.

It’s better to dream small than to not dream at all!