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HOW TO START A BUSINESS : Getting Money to Start a BusinessGetting money to start a business will be tough in a down economy, but not impossible. Depending on the type of business and the amount needed, you may need to acquire money through a variety of different ways (See Below). 1. Personal Resources Many investors want to make sure that you are vested in your own business concept. This will be their question: “How much of your own money do you have in the business?” If you are not willing to risk your personal resources, no one else should put theirs at stake. In order to utilize personal funds, an individual may have a number of options, which include savings, credit cards, 401K plans, and home equity lines of credit. The most easily accessible financing source would definitely be any savings. Credit cards are also a viable tool to use in times of need. However, be prudent in what you place on the credit cards because the payments may stretch out for years. Various retirement plans such as 401K's have also been effectively used to start a business. A 401(k) is a tax deferred savings account established by an employer for its employees. Some plans allow for the holder to draw funds down. This is a costly way to fund a business because the taxes, penalties and fees are extremely high. However, if this business concept is one that you believe you must pursue, then this is an option. Although creative options exist to help eliminate the majority of the taxes, penalties and fees, a team of professionals, including an attorney, accountant, valuation specialist and a securities firm specializing in Employee Stock Ownership Plans (ESOP) is definitely needed. Take into consideration your age and the time it would take to replace the funds taken out of the fund if the business does not succeed. Be prudent in your decision-making, because what may have taken a lifetime to accumulate can slip away in a matter of minutes. Home equity lines of credit were extremely popular for business use prior to the recession. Now, banks are much more conservative with the appraisal of the properties and the associated distribution of cash related to properties. In addition, banks are also looking to decrease their risk by decreasing the amount of exposure they hold. Be very careful with this option because ultimately you are placing your home at risk in the event of non-payment of the loan. 2. Family & Friends The second most popular source for capital is borrowing from family and friends. While this option may appear to be an easy and informal task, the result can be disastrous with far reaching effects on the relationship. Whatever you do, whether good or bad, will be the topic of discussion at family gatherings for years to come. Even though family and friends hold a close relationship to you, carry yourself with integrity and treat their investment as a business transaction. The agreement should be in writing so that both parties’ expectations are fully understood. Be clear up front whether their money is an investment in exchange for stock and company ownership, a loan with certain payment terms accompanied by interest or a “gift” with no strings attached. Be careful when the money is considered a “gift” because if the business is a huge success, the expectation of the “gift” giver may change even though the agreement was in writing. If you are uncertain as to whether the money should be a gift, investment, or loan, we recommend classifying the transaction as a loan. As a loan, they are not involved in the activities of the business and you are treating their contribution with respect. If family and friends reject your business proposal, try not to take it personally. It’s their money and they have the right to do with it as they see fit. 3. Bank Financing Rarely do startups receive bank financing, due to the fact that not only is a business plan requested but actual financials as well as business and personal tax returns are evaluated in the process. Most bank financing is guaranteed by assets pledged to secure the payment. This means that if you do not pay, the bank has some other alternative to ensure the debt is repaid. Business and/or personal assets may be pledged as collateral for a bank loan. The most common types of collateral include equity in the home, business accounts receivable, inventory and equipment of the business. The collateral is typically reviewed and based on the age and condition, a value is assessed and the decision is made whether to lend. Be prepared to personally guarantee this loan as well even though it is for the business. Banks are conservative and want to hold as many as possible responsible for repayment of the debt. Some loans may be guaranteed by the Small Business Administration (SBA). Although the SBA does not lend money directly, they will guarantee the debt if it falls into certain categories. The 7(a) Loan Program is the SBA’s primary loan instrument. It is used for startup and existing small businesses and is administered through commercial lending institutions. The 504 Loan Program is used to acquire fixed assets such as real estate or equipment. It is primarily administered through Certified Development Companies (CDCs), which are private, non-profit corporations established to promote economic development in various communities. For smaller amounts up to $35,000, the SBA has a Microloan program available for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and equipment. The Microloan can be used for startup or expansion. 4. Angel Investors Angel Investors are also known as Venture Capital investors. Venture Capitalists (VCs) are individuals or firms that specialize in providing capital for new or existing businesses. Companies that project high growth potential are prime targets for venture capital funds. Typically, VCs seek equity or ownership in the company along with potentially some control. Technology companies have traditionally been big recipients of VC money. Finding VCs is part of the difficulty of accessing their funding. In order to find VCs, ask around starting with the Chamber of Commerce, Small Business Development Centers, accountants or lawyers in the area. The SBA created a program entitled the Small Business Investment Company (SBIC) Program to bridge the gap between an entrepreneur’s need for capital and traditional financing sources. Go to www.SBA.gov for more information as well as where the nearest SBIC office is located. In addition to investing capital, SBICs provide involvement in the companies in the following ways: board and company management participation, strategic planning and marketing, financial support and company exit support. 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But as Professor ...Selecting Your Type of Business May 20, 2009Indeed starting a business and what type of business is one of the most challenging tasks anyone can undertake. One must balance ...Right time to start a business? March 29, 2009I am in my 20s and recently laid off. I have always been interested in starting a business, but with the state of the economy, I am a little unsure ...Start a Business in a Recession March 24, 2009Believe it or not but some entrepreneurs are actually looking to start a business in these economic times. ...How to Start a Start-upAndy McLoughlin spoke a little while ago about how he started a business, Huddle.net, from a simple business idea in a pub to a fully working new business... |
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