Home Business
(featured
column)
Financing Your Home Business
by Elena
Fawkner
So, you have a great idea for a business and, more importantly,
the know-how to bring it into creation. The only thing you’re missing is the
cold hard cash to get started. What are your options?
* * *
Assuming you don’t have a ready line of credit,
an expansive bank manager, wealthy relatives or a substantial stash of
retirement savings you’re willing to risk, you’re going to have to do some
serious homework and legwork. Fortunately, there are a number of sources of
finance for the fledgling small business entrepreneur, at least one of which may
be right for you.
SBA LOANS
Available only to U.S.-based businesses (but look for similar programs in your
own country if you’re outside the U.S.), the SBA (the U.S. Small Business
Administration) has assisted thousands of entrepreneurs start their own small
businesses. The SBA doesn’t issue grants (money you don’t have to pay back)
or make loans directly, rather, it guarantees loans made by private lenders
thereby reducing or eliminating the risk inherent in new business ventures and
making lenders more willing to lend.
The primary consideration for the SBA is repayment ability from the cash flow of
the business as well as “good character, management capability, collateral and
owner’s equity”. You will be expected to personally guarantee your loan.
This means your personal assets are at risk.
As for the types of businesses eligible for SBA loans, the SBA imposes the
following criteria: the business must be “for-profit” (all that means is
that your business has a profit motive, not that it has actually generated a
profit yet), be engaged in business in the United States, there must be
“reasonable” owner equity (what’s reasonable will depend on the
circumstances) and you are expected to use alternative financial resources
first, including your own assets where practicable.
The SBA also imposes limitations on the use of loan proceeds. For example,
although the proceeds can be used for most business purposes (the examples given
by the SBA include “the purchase of real estate to house the business
operations; construction, renovation or leasehold improvements; acquisition of
furniture, fixtures, machinery and equipment; purchase of inventory; and working
capital”), you can’t use the loan proceeds for financing floor plan needs,
to pay existing debt, to make payments to the business owners or to pay
delinquent taxes etc.
As a general rule, loans for working capital must be repaid within seven years
and loans for fixed assets must be paid for by the end of the economic life of
the assets (but not to exceed 25 years).
Interest rates are negotiated between the borrower and the lender but the SBA
imposes maxima which are pegged to the Prime Rate.
Finally, the SBA charges lenders a guaranty and servicing fee for each loan
approved, and there is nothing preventing the lender on charging these fees to
the borrower. The guaranty fee for a loan of $150,000 or less is 2% of the
guaranteed amount; over $150,000 but below $700,000, it’s 3% and above
$700,000 it’s 3.5%. The annual servicing fee is 0.5% which is calculated on
the then-current loan balance.
Where the borrower meets the SBA’s credit and eligibility requirements, it
will guarantee up to $85% of loans $150,000 and less and up to 75% of loans
above that amount (up to a maximum of $1,000,000).
For more information about the various SBA loan programs, visit the SBA website
at www.sba.gov
PRIVATE GRANTS
At present, there are no U.S. government grants offered for small business. If
you're outside the U.S. check with your own government about the availability of
small business grants. You never know!
Various corporate grantmakers make grants available for small business though.
For more information, visit www.fdncenter.org.
ANGEL INVESTORS
Angel investors are good souls with a healthy sense of self-interest. Figuring
they can get a higher return if they’re prepared to take a bit of a risk,
they’re also often successful entrepreneurs themselves and want to give their
fellow travelers a hand up.
Think of funding from an angel investor as a bridge or gap-filler between being
a start-up and qualifying for venture capital. The kinds of dollars we’re
talking about here are between about $150,000 and $1.5 million. Beyond that
point you’re in low venture-capital territory.
The SBA estimates that there are around 250,000 angels in the U.S., funding
about 30,000 companies a year. So, how do you hook up with one? Not an easy
task, unfortunately. It comes down to networking. Start by talking to
professional and business associates - they will often know someone who knows
someone etc.. Also, check out ACE-net if you’re prepared to sell a security
interest in your company. It’s an internet-based listing service for
securities offerings of small, growing companies. The website is at https://ace-net.sr.unh.edu/pub/.
VENTURE CAPITAL
You’re in the big leagues now. Generally you’re in the ballpark of millions
(of dollars that is) rather than thousands. Venture capital firms look for their
return on investment from capital appreciation rather than interest (unlike
banks, for example). They’re generally looking for a return of 500-1,000% on
exit.
It won’t surprise you to learn that venture capitalists are particularly leery
of internet-based businesses right about now and not without good cause. It also
serves them right. But if you have a solid business plan and strong growth
potential, this could be an option for you longer term.
One of the common concerns about this form of financing, however, is that you
may have to part with an unacceptable amount of control over your own business.
In return for their risk, venture capital firms will usually want some control
over how the business is run and a say in business decisions. A venture
capitalist will expect a seat on the board, for example.
It’s important to remember, though, that it’s in the venture capitalist’s
best interests for your business to succeed, so giving up some control in
exchange for outside expertise may well be something worth thinking about.
To find venture capitalists, get a hold of “Pratt’s Guide to Venture Capital
Sources” for a listing of 1,500 or so including names, contact details and
areas of interest. Of course, you'll find no shortage of information online as
well.
For most readers of this article, your best bet would be to start out by
investigating the various loan programs offered via the SBA (or your country’s
local equivalent). But don’t overlook more obvious, close to home sources
first. For example, if you have family funds at your disposal and you’re
confident that your business will succeed, better to start out slow and ease
into outside sources of financing as your business cash flow can support it.
After all, Uncle Jack is much more likely to be understanding about the
occasional cash flow crunch than your bank manager. Of course, if you're NOT
confident that your business will succeed, don't get into debt with *anyone*,
let alone family members.
* * *
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Copyright 2002 by Elena Fawkner
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