Financing Your New Business

Small business is still the backbone of the American economy. Every year, thousands of new businesses open their doors. Unfortunately, the vast majority of those endeavors close down before their first year ends. Why? Studies show that the main reasons for the failure of new businesses are a lack of management experience on the part of the owner, and insufficient financing. Operating capital is crucial during those first months, and even years, when the business is growing but has yet to reach the point of actually being profitable. The operating expenses of the business must still be paid; therefore, it is essential that adequate financing is in place during this time of being “in the red”.

There are a number of possible sources for start-up financing, but whichever one you choose, it’s imperative that you have a solid business plan in hand. The plan should describe in detail the type of business that you propose, why you believe the business will succeed, how you intend to promote your business, the amount of money you will need and why, the equipment that you’ll need, and your estimate of how long it will take to become profitable. You can get help writing your plan from the Small Business Administration’s (SBA) website. Be prepared to be fully scrutinized; both your plan and you personally. Prospective creditors will have more than just a passing interest in your credit rating, your personal financial assets, and your character.

Listed below are some potential sources to meet your business capital needs:

• Your local bank. Banks are in the business of making loans, both of the consumer and business varieties. If you already have an established relationship with a particular bank (by checking and savings accounts, CDs, or a mortgage, for example), so much the better. Ask if the bank participates in any Small Business Administration (SBA) programs.
• Finance companies. These companies may be slightly less rigid than your bank, but their interest rates will also be higher. Term lengths tend to be somewhat shorter as well.
• Venture capital. Venture capitalists are small companies or private investors with money to lend. Depending on their investment goals, you may or may not have to pay the money back. If you don’t, they will take an equity position in your business and receive part of the profits. Venture capitalists can be found on the internet or local newspapers under “venture capital”.
• Refinance your home. If you’re a homeowner, consider a home equity loan or line of credit to finance your business. But be careful; you must weigh the pros and cons of using this resource. If things go bad in your business, you could lose your home.
• Family members and friends. Make sure that you draw up a contract with specific terms, for the benefit and protection of both of you. Be sure not to take advantage of them in any way if they’re good enough to lend you the funds that you need. You might even include them in some of the profits as another way to say “thank you”.