Starting A Small Business? Use These Tips To Find Funding

Starting A Small Business? Use These Tips To Find Funding

By Steve Strauss for USA TODAY

 

Q: Steve — This USA TODAY Small Business Challenge makes me want to start a business too, but my question is, where does one find the money to start a business? — Stephen

A: This question reminds me of a quote by Benjamin Franklin: "If you would know the value of money, go and try to borrow some." No, finding the money is not easy — but the good news is, if others did it, so can you.

There are plenty of sources, which is a good thing, because it is unlikely that you will get all of your desired funding from any one place.

My colleague Rhonda Abrams suggests that the best place to find the money is from your own sales, and that is a smart plan. That said, if that is not a viable option for you, here are your other choices:

The power of one: The first place you should look for the money to start your business is. .. in the mirror. Most new small businesses are started using funds, at least partially, from the new owner himself. Even if you are looking for outside investors, they will want to see that you are sharing some of the financial risk.

So if you have savings, you will likely need to tap some of it. Maybe you will be getting an inheritance down the road; if so, check and see whether you might be able to get an advance on it. Other entrepreneurs use their IRA or 401(k) funds, despite the penalties. If you still have a stock portfolio, consider selling some of it. You will have to be creative and a bit bold, but that is what will likely be needed if you are going to make your dream come true.

The friends and family plan: The next most common method of funding your start-up is to find friends and family members who believe in you and who would be willing to invest in your new business.

This is where a well-written, viable business plan comes in handy. If you want to be considered a serious business person by those around you, then you must act like one, and part of that is having a good business plan. If you can show potential investors a plan that makes sense and one which explains how they will be paid back in a reasonable amount of time, the chances of getting them to invest will be much higher.

One of the great things about this option is that friends and family tend to offer very sweet terms — either interest-free or close to it.

Credit cards: Another very popular option for funding a start-up is the credit card. According to one study, almost half of all businesses use credit cards when getting started. Again, it is easy to see why this is a well-liked choice:

• Credit cards are readily available
 

• They can be paid back in installments
 

• You don't need to convince anyone that you have a great idea.

Bank loans: Contrary to popular belief, many banks are still making plenty of small business loans, and that is a good thing; your banker can be a really good friend to your business. Not only do they help you get started financially, but the best banks look to be trusted advisors to their small business customers.

One especially attractive option is a loan guaranteed by the Small Business Administration (SBA). By acting as a guarantor, the SBA reduces the risk to the lender, and so many more small business loans are made.

Angel investors: For the new small business, angel investors could not be better named. Typically, angels are individuals who have made a lot of money in a particular industry and are looking to invest in new start-ups, often (but not always) in that industry. Deals with angels can take several different forms:

• They may ask for a piece of the company, some "equity."
 

• They may just offer a loan, but probably at a considerable interest rate
 

• They may even want to be part of the business, either as an advisor or principle

Where do you find angels? Usually through networking. Speak with your accountant and lawyer, with real estate agents, bankers, customers, with people where you worship, and with sales reps and business associates. It is also possible to find angels online by doing a Google search.

Venture capital: Your final option when looking for start-up capital is the venture capitalist. If an angel investor is someone with plenty of money, a venture capital is a group of people with even more money, and as such this route only makes sense if you are planning on starting a significant business requiring hundreds of thousands of dollars (or more.)

Today's tip: When looking for a loan, banks and other lenders typically look at your "Five C's":

1. Capacity (to repay the loan)
2. Character (history of repayments)
3. Collateral (whether you have any)
4. Capital (how much you need), and
5. Conditions (yours and that of the economy).

Ask an Expert appears Mondays. You can e-mail Steve Strauss at: sstrauss@mrallbiz.com.And you can click here to see previous columns. Steven D. Strauss is a lawyer, author and speaker who specializes in small business and entrepreneurship. His latest book is The Small Business Bible. You can sign up for his free newsletter, "Small Business Success Secrets!" at his website —www.mrallbiz.com.