Financing Your Start-Up Business

So, let's be honest right from the start! Banks and other traditional lenders do not lend money (loans or leases) to start-up businesses.

So, let's be honest right from the start! Banks and other traditional lenders do not lend money (loans or leases) to start-up businesses.

They deem them too much of a risk - a risk that means that these lenders don't think (and history has shown) that they will not get paid back.

And, what all these lenders want is to get paid back - that is how they make their money - just like you want your customers to pay you for your goods and services.

Having said that - it does not mean that your start-up business cannot get funding. There are many ways to raise capital for a new business - some you might have heard of and some you might not - that is until now.

Overview Of A Start-Up Business:

In the eyes of most people - particularly lenders - start-up businesses are not just businesses that have yet to open their doors. Your business could be in operations for years and still be considered a start-up business.

It really comes down to two things:

1) Limited operating history.

2) What your business is doing. Is it still in a research and development phase? Has it yet to commercialize any products? Is it not making any revenue?

Thus, while you may think your small business is just that, don't be offended if some else - principally a loan officer calls your business a start-up.

- Back To Top - Search For Small Business Loans

What Lenders Look For:

Almost all lenders look for the following two main items when approving (underwriting a business).

First, the lender wants to ensure that you and/or your business has the ability (the means) to repay your loan. To determine this, most lenders/bankers will look at your past results to see if you (either from personal income / family income or from your business) had the cash flow in the past to make the loan payments.

(Note: - Your potential lender does not really care about what you think you can make with your business should you get a loan. But, wants to see that what you have done in the past would cover their payments).

Lenders believe that if you have been able to generate enough cash flow in the past, then you are more likely to do the same in the future.

This is also why most lenders like to see several years (three at the least) of positive cash flow in determining what your business should make (earn) in the near future.

Keep in mind that your past cash flow does not have to come from only business activity but can be from personal resources like from a job, another business, an annuity, a spouse, a retirement plan, etc.

Second, the lender wants to see if you have the willingness to repay the loan. Your willingness is determined by your past credit history (credit report and credit score).

If you have demonstrated that you have not repaid other creditors by walking away from loans (personal or otherwise) then this new lender will simply believe that you will do it again and they will decline your loan request.

Also, do know that until your business becomes a very large, multi-nation company, the lender will always pull your personal credit in making their determination.

And, they know about all the tricks of trying to build business credit to get around a poor personal credit history. Instead of wasting time and money trying to get around a poor credit score - take that time and energy and work to fix your credit - it is not as hard as you might think.

If you meet these basic criteria - then your potential lender will look for additional means of repayment like collateral, conversion of assets (turning raw materials in to finished products to be bought and paid for by customers) personal guarantees or co-signers.

The reason is that banks/lenders know that businesses struggle from time to time - which tend to result in losses for them. Thus, since the bank is in the business of getting repaid - they want to ensure that they have several resources to go to should you default on your loan - including coming after your personal assets and future income.

- Back To Top -

Ways To Fund A Start-Up Business:

When you have exhausted all the traditional routes to raising capital for your start-up business, you might want to try one or more of the following (know that this is not a complete list):

1. Using Personal Assets
   
   
   • Home Equity Loans,
   • Tapping Retirement Accounts - either loans or to direct the account to invest in your business,
   • Personal Credit Cards - the most popular option ever,
   • Savings,
   • Securing loans with stocks and bonds or other valuable assets,
   • And, even unsecured personal loans - if you have the income and credit to qualify.
2. Local Investors - Networking for and receiving loans or investments from local individuals or businesses in your community that either want to give something back or that are looking for ways to earn higher returns on their spare cash.
   
   See Our Section On Local Investors For More Information And How To Approach These Investors.
3. Professional Investors - Venture Capitalist and Angel Capitalists - To attract professional investors your business must have an extremely high growth potential (not in millions of dollars but billions of dollars). These investors are looking for big returns (30% or more per year on their investment) and most small or Main Street businesses just can not provide this.

   To See How Your Business Might Qualify - See The Following:

   • Venture Capital
   • Angel Capital
   • Small Business Investment Companies (SBIC)
4. Friends and Family Loans and Investment - If those you know, even from your social networks, have the ability to help fund your business and believe in you - then you should only have to ask. Even if your immediate friends and family cannot invest in your business - ask them anyway as they know of others that can and will. You just have to ask.
   
   For Pros And Cons - See Our Friends And Family Loans Page.
5. Keeping Your Day Job - There is no reason that you cannot continue to work while starting your business part-time. Many business owners have done this in the past with a lot of success. Simply use the money you earn from working to fund your business as best you can.
6. Crowd Funding - This is where you solicit donations or contributions from your social network or just people at large. If they believe in your business and in you - you could easily raise a few thousand dollars in small donations to help you get started.
   
   Now, there are laws against how much you can raise and from who you can raise it from - if you are to give away equity in your company. So, it would behoove you to either use one of the many crowd funding sites out there or hire a securities attorney.
   
   To Learn More About This Funding Option - See Our Crowd Funding Page.
7. SBA Loans. But, know this. If your business or start-up does not qualify for a traditional business loan due to limited income or poor credit - it will not qualify for a SBA loan as the banks still underwrite these loans and the SBA only guarantees them.
   
   To Learn About The SBA's Loan Programs - See Our SBA Loan Page.

Just know that where there is a will there is a way. You just have to get out there and pound the pavement. It really starts with getting out and talking to people - talk to anyone who will listen - then listen back - you just never know!

- Back To Top - Search For Small Business Loans

What Businesses Usually Do:

Most new businesses - even the most successful ones today - have self-funded until they were able to either 1) drum up enough business and use that business - their invoices, purchase orders, payments receipts to qualify for a factoring business loan (an assets based loan or advance - based on the conversion of those assets into cash) or 2) become cash flow positive enough (with enough time in business) to qualify for a traditional business loan.

To do this - most start-up businesses use whatever they have at hand - personal credit cards, savings, tapping retirement funds or relying on a spouse's income.

These entrepreneurs believe in their business enough to risk their financial future for potential bigger and better rewards when their companies become household names.

Sorry to say - but that is just the way the business world works. You have to first understand this and then find ways to succeed within it.

- Back To Top -

A Few Well Known Examples:

Dell Computers - Michael Dell

In 1984, as a first-year college student in Austin, Texas, Michael Dell borrowed $1,000 from his parents to start a computer accessories business. He began by selling kits to help customers upgrade their personal computers, establishing a business model his company, Dell, Inc., still follows today: sell directly to consumers, eliminating the middle step of a retail store or a distributor, and hold on to far more of the profits. In just two decades, Dell's company grew to massive proportions, with more than 47,000 employees and annual revenues of more than $40 billion.

Source: http://www.notablebiographies.com/news/Ca-Ge/Dell-Michael.html

EDS Systems - Ross Perot

In 1962, she (Margot Perot - Ross's wife) loaned Perot $1,000 from her savings account to start EDS, a one-man data processing company. It cost at least that much to incorporate in Texas. Perot, at the time, had two regular paychecks and his wife had a third. The company ultimately became a multi-billion dollar corporation employing more than 70,000 people.

Source: http://www.famoustexans.com/rossperot.htm

Dallas Mavericks - Mark Cuban

In 1982, Cuban moved to Dallas, Texas. Cuban first found work as a bartender, then as a salesperson for Your Business Software, one of the first PC software retailers in Dallas. He was terminated less than a year later, after meeting with a client to procure new business instead of opening the store.

Cuban started a company, MicroSolutions, with support from his previous customers from Your Business Software. MicroSolutions was initially a system integrator and software reseller. The company was an early proponent of technologies such as Carbon Copy, Lotus Notes, and CompuServe.

In 1990, Cuban sold MicroSolutions to CompuServe-then a subsidiary of H&R Block-for $6 million. He retained approximately $2 million after taxes on the deal.

In 1995, Cuban and fellow Indiana University alumnus Todd Wagner started Audionet, combining their mutual interest in college basketball and webcasting. With a single server and an ISDN line, Audionet became Broadcast.com in 1998.

By 1999, Broadcast.com had grown to 330 employees and $13.5 million in revenue for the second quarter. In 1999, during the dot com boom, Broadcast.com was acquired by Yahoo! for $5.9 billion in Yahoo! stock.

Source: http://en.wikipedia.org/wiki/Mark_Cuban

Facebook - Mark Zuckerberg

Although there is some controversy here, it is thought that Facebook was originally financed with a $1,000 investment from a college friend (Eduardo Saverin).

The latest private-market transaction in Facebook holdings on SharesPost priced 100,000 shares at $32.00 apiece, which gives the company a total implied value of $80 billion.

Source: http://www.allfacebook.com/facebook-has-80-billion-value-in-latest-auction-2011-04

 

- Back To Top -

Business Financing Stories:

To see how other successful (but less well known) businesses have bootstrapped or self-funded their businesses;

Check out these business financing stories:

- Back To Top - Search For Small Business Loans

Copyright 2007 - 2013 - Business Money Today - All rights reserved