How to Finance Your New Business

There are many creative ways to finance yourwere unable to obtain a loan at reasonable terms.
business. Here are some common and creative waysThe SBA guarantees 75% or up to $750,000 of the
to finance your business venture.loan made by a private lender. As the business owner
Family and Friendsyou must personally guarantee the loan and
1. Write a business proposal as if you were going todemonstrate your cash flows are sufficient to repay
write one to obtain a loan from a banker. Discussthe loan.
what the business does, the market demand for theAngel Investors and Venture Capital
product or service, how you intend to market yourMany start-ups have received Angel investment.
product or service, include financial projections: inAngel investors specialize in early stage financing.
what time frame do you anticipate the business willThey are often more willing to invest in ideas where
be making a profit. Include financial statements andthere is too much risk for a bank and not enough
tax returns.potential for a venture capital firm. They usually
2. State how much money you need, what theinvest smaller amounts anywhere from $100,000 to
money will be used for and the terms of the loan3Million and are willing to invest for the long haul- 5
such as the interest rate, how you intend to pay theyears or more. Many times companies will start with
loan back whether this be in a lump sum or inan angel investment, in the event the company
scheduled payments. You should also state whetherbecomes a high net worth company and huge profits
the loan is secure, that in the event you are unableare easily foreseen a Venture capitalist is most likely
to pay the loan the lender will have a percentage ofto become involved.
ownership in the business. In making your proposalVenture Capitalists specialize in high growth industries
more attractive to the lender you may considerand rarely invest less than 5Million at a time, as they
having a promissory note or agreement stating thewant the company to grow quickly, ideally having the
financial terms, scheduled payments and entitlementcompany go public, so as to cash out in the shortest
to the business in the event the note is not paid.time possible usually 3-5 years. It can be extremely
3. Don't forget the tax benefits in using a promissorychallenging obtaining venture capital, on average
note, if for some reason you are unable to repay theventure firms receive 1000's of business plans yearly
loan in full, the lender will be entitled to a taxand are highly unlikely to invest in a business that
deduction known as "bad debt". Warren Buffet whowas not referred to them by an acquaintance. It is
is now the second richest person in the world with anestimated that only 1 in 600 business plans received
estimated net worth of 40Billion, raised $105,000 forfrom Silicon Valley venture firms even get
his first business from 7 partners, two of which wereconsideration let alone funding.
his sister and aunt.In order to increase your chances of funding, it is
Equity in Exchange for Expertiserecommended you join business associations and
If you have a brilliant idea you maybe able to findbusiness organizations that have the involvement of
others, who in exchange for there services are willingventure capital firms, this way you can network and
to accept some form of equity. This can be legalmake valuable contacts. In the meantime, while you
services, engineering services, or marketing services,are networking and getting your name out there,
the possibilities are endless. For example: many newcontinue to build and refine your product or service
start-ups require legal formation such as becoming amaking it better each and everyday. Don't be
corporation. You can contact licensed attorneys indiscouraged if your business plan is rejected, as this is
your area, who specialize in start-ups, manyvery common and does not mean you do not have
attorneys if the idea is one where the potential fora great idea or business. Scott Cook, founder of
future profits is great, will agree to postpone legalIntuit with a 2Billion plus company which provides
labor costs, and will request you only pay upfrontaccounting software - Quicken and Quickbooks, was
costs, such as the filing fees. You can offerrejected by every venture firm in 1984, the venture
anywhere from 1-2%, for the postponement of legalfirms said, most people don't have a computer let a
fees and agree to pay the legal fees once fundinglone require computer accounting software, therefore
has been obtained.not a large enough market exists for us to invest in
People are eager to be apart of the next big thing, init.
giving an attractive proposition with reasonable termsHome Equity Lines of Credit
and conditions you can create winning businessIf you own a home with a substantial amount of
relationships allowing for your company to grow andequity you many want to consider obtaining an
become successful. Countless start-ups have utilizedequity line of credit as they offer some of the best
this financial strategy in launching their business. Wheninterest rates available. It is important to consider all
Google was just an idea, Google's Larry Page andthe risks carefully, as you need to make monthly
Sergey Brin, had convinced their landlord to takepayments and do not want to lose your family home
stock in their company in exchange for free rent.to launch your new venture.
Commercial LoansBusiness Plan Competitions
In applying for a commercial loan there will be manyBusiness plan competitions are a great source in
paper requirements, which generally include yourobtaining capital to start your new venture when you
business plan, financial statements, credit report,don't have the connections to angel investors.
incorporating documents and tax returns. ABusiness plan competitions have become very popular
commercial bank will evaluate your business on thein the last few years many universities and leading
basis of the 5C's of credit:companies have business plan competitions. You
1. Capital- how much of your own money do yousubmit your executive summary or business plan, and
have in the businessif selected usually pitch your business to a group of
2. Character- your reputation in business, they willjudges who will award funding to the best business
look at your credit score, credit history, such asideas. Some competitions have restrictions where
making your payments on time, the amount owing toyou have to be affiliated in someway.
other creditors and if you have any judgments orThe Stanford University business plan competition
liens.requires 50% of the team members be Stanford
3. Capacity- your business cash flow and the ability tograduates, while others are open, such as the Rice
repay the loan.University business plan competition, where they
4. Collateral- assets you business owns such asallow graduates from all parts of the globe to apply.
equipment or real estate as security for the loan.In April 2009, the Rice University had 42 groups
Potential Guarantees that is someone else's ability topresent their business ideas before a group of
repay the loan if you don't.judged, 3 of which were awarded a payment of
5. Conditions- how do you intend to use the funds$125,000. For a list of business competitions visit:
and for what purpose.Credit Cards
In applying for a commercial loan you want toCredit cards can be a great source to quick cash.
investigate several lenders, as to what businessesMany credit cards offer cash advances at very low
they finance, compare interest rates and terms.interest rates for the first 6 months, which you can
Small Business Administration Loans (SBA)transfer after the low 6 months interest rate has
In the event you are unable to obtain a commercialended. Usually credit cards can be a short term fix to
loan you can apply for a SBA loan, as a requirementa financial need, but they are not recommended for
in applying for a SBA loan is you have to havethe long-term.
sought out a loan from conventional lenders and