FINANCING YOUR BUSINESS

Perhaps the most difficult part of starting your own business is the procurement of needed financial resources and inadequate financing is often the cause of business start-up failures. There are eight principal sources of financing:

1. Personal Resources: This includes bank and savings accounts, credit card borrowings, a second mortgage on your home, the sale of investment assets, the cash surrender value of life insurance or perhaps the loan value of a 401K program. You will be expected to provide 30% to 50% of the financing to start you business!

2. Family & Friends: This source could also be considered part of your personal resources. It could include family or friends making a personal loan, an equity investment, or co-signing your note at a financial institution. Whatever the mode, you must regard the assistance on a business basis, with appropriate note agreements, and other formal legal documents.

3. Direct Bank Loans: If your business is a start-up, this is an unlikely source. Collateral alone is not sufficient to initiate a loan from a bank. A proven track record of three years of profitable operations is a common requirement of this source.

4. SBA Guaranteed Bank Loans: A more likely source but again requires some form of successful track record. If you have a prior business experience that was profitable, this could help you. Seek professional help to fulfill the bank and SBA application requirements (including a SCORE Counselor). There are a number of options in SBA guaranteed financing.

5. Lease Financing: This is a good source for equipment acquisitions. A lease typically involves less detailed credit requirements but be sure of the rate, term and what occurs at the end of the lease.

6. Vendor Financing: This source is especially applicable to an existing company that is growing profitably. Vendors want new customers who are able to pay their bills and will reward them with special payment terms and even in some situations, inventory on a consignment basis. Cultivate your vendors and remember that low price is not necessarily the best choice.

7. Strategic Alliances: This is a very specialized source of financial help and most often occurs with a small company that has a very unique (and often patented) product. They can sometimes structure an agreement with a larger company that has a long-term interest is the product or the company.

8. Venture Capital: Not likely in a start-up but for a successful small business that is growing rapidly, a venture capital partner is sometimes a reasonable alternative. Remember that partners want equity positions so seek competent accounting and legal counsel when considering this type of financing resource.

Obtaining needed financing is difficult and appropriate assistance is nearly mandatory. Consider a Counseling Request from a SCORE counselor and attend our workshop on “Financing Your Business”.