Most people who go into business are a bit put off at the idea of risking their own money. They don’t mind going to banks, friends or family for money and will even boast at how smart there were to get their business up and running without putting their money in danger. This sort of thinking when starting a business is dangerous and it shows a lack of confidence in their own business plan. Anyone who would invest in the business of someone who was not willing to risk his own capital is making a big mistake and you will find very few out there who will do this.
Your own money is always the best to use when starting a new business. It’s better than having to borrow money, which will have to be paid back, with interest and out of the company operations. So, your first true source of capital is your own savings.
If you have managed to save several thousand dollars by working for a few years before starting your own business then you will have, at least, the seed money needed to get your business off the ground. Doing it this way will mean that others will have more confidence and faith in your new business and be more willing to put their money into the business.
That and using the list below will be the best course of action when trying to come up with funding or venture capital for your business.
Personal Property that you own . If you own a building or vacation home, land, an automobile or any other tangible asset, you can either sell it or take out a second mortgage on it to raise capital for your new business. This also applies to any life insurance you might have that has built up a cash or loan value. If you borrowed against a life insurance policy the rate of interest would be lower than that of a bank, which works in your favor when repaying the loan. Plus, the loan principle would never need to be repaid because; when you die the insurance company would simply deduct the outstanding loan balance from the benefits of the policy.
Family and Friends. This is another productive way of raising capital for a new business. Discuss the possibility with family and friends and don’t forget about those great uncles and third cousins. You could borrow the money as an outright loan or even consider the lender as part owner of the business based on their financial contribution. Another idea would be to set up a corporation and sell shares of stock to any friends and family who might be interested in making a financial investment in the new business.
Banks. If your credit history is acceptable, you have a savings account, hold a steady job then you should have no problem getting a loan from a bank for several thousand dollars. Most banks will give a loan that matches what you have in your savings account. This way your savings account will continue to earn interest as you pay the loan back in installments. Unless you have a savings account or personal account with a high balance you will find that most banks are not interested in loaning money to a new business venture. They won’t even consider a loan unless you can prove that you have sufficient start-up capital of your own. By sufficient I mean at least 50% of the money needed to start the business. To get the attention of the bank, first show that you have at least 50% of the needed capital then provide them with a good business plan, a pro forma balance sheet and an operating statement.
Finance Companies. A commercial finance company will require collateral on any loan they give. Pledging your accounts receivable or your business inventory can do this. The interest rates on a loan from a finance company would be extremely high so you are much better off trying to secure a loan through a bank or other source first.
Credit from suppliers. When you deal with suppliers they will ship the merchandize to you and bill you for it, giving you thirty days to pay. This is essentially lending you capital for your business. It’s known as “trade credit” and is always an excellent source of short-term financing. To keep this avenue open during the lifetime of your business it is important to always pay your suppliers on time or earlier which will gradually build your credit standing with them.
Leasing. This is close to the trade credit I talked about above. Equipment you may need such as cash registers, showcases, office furniture and the like can often be leased, rather than bought out-right. Leasing these items will help you keep costs down which means less capital needed to begin with.
Venture Capitalist. There are firms and investment groups or even individuals who might be interested in investing in the start up of your business. If your company displays exceptional growth potential these firms may be interested in furnishing equity capital for the expansion if they feel they can recover their investment in a few years time.
If you are a minority you may find funding through a Small Business Investment Company or SBIC . Be sure to check www.nasbic.org for a list of companies that invest in businesses run by minorities
The Minority Enterprise Small Business Investment companies or MESBIC supplies long term financing for modernization and expansion as well as equity type capital for minority business owners. The MESBIC are privately owned and managed investment firms, chartered by the Small Business Administration. The U.S. Small Business Adminstration licenses both the SBIC and the MESBIC.
The Small Business Administration. This agency was designed by the federal government to aid and assist the interests of small business concerns in order to preserve competitive enterprise. It has many lending programs that provide financing to small firms for business construction, conversion or expansion; for the purchase of machinery, equipment, supplies or materials; and for working capital. They will either participate with a bank in loaning capital or will guarantee up to 90% of the loan. If there are available funds the SBA will loan the money directly to the business owner. The first step when considering this type loan is to get a bank interested in lending you the money. If the bank turns you down you next move would be to visit with an agency loan officer at an SBA field office to discuss your situation and needs. He or she review the problem and suggest a course of action. If the situation looks promising, you will receive instructions for proceeding from that point.
Whichever way you choose to look for funding don’t make the assumption that the source you go to likes taking risks or that they should be willing to take a risk just because you feel you have a good idea for a great business. The fact is, they are prepared to take a certain amount of risk if they feel the business has a good chance of producing a high rate of return on the money they invest or loan you. Once you understand this it is clear that your approach needs to be clear, backed up with figures and demographics and some sort of proof that the business will actually succeed and flourish. Make your case a simple case; back it up with a well-written, in-depth business plan and you should shortly be on your way to making those business dreams come true.