Financing Your Home Business
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 cashflow 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 oncharging 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 http://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
http://www.fdncenter.org/funders/grantmaker/index.html
.
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 travellers 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 cashflow can support
it. After all, Uncle Jack is much more likely to be
understanding about the occasional cashflow 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.
About the Author
Elena Fawkner is editor of A Home-Based Business Online
... practical business ideas, opportunities and solutions
for the work-from-home entrepreneur. http://www.ahbbo.com
|
