Real Small Business
What sort of financial resources are available to small businesses?
Here's brief descriptions of the different types of "traditional" financing small businesses often utilize.
Family and Friends
Loved ones, friends, and friends-of-friends are the best place to start your search for capital.
About three-quarters of start-up capital for the nation's small businesses is provided from family and friends or business owners themselves.
If you borrow from family or friends for your small business, only take money from people you know can afford to lose it. If someone won't be able to feed their family if your business goes under, don't take a dime from them.
Also, only borrow from people who are relaxed about money and won't be butting into your business every day to see how "their" money is being spent.
An even better financing bet than friends is acquaintances.
To find acquaintances who are looking for an investment, ask your accountant or attorney. They know your business and can recommend it as an investment to their clients. Also, tell colleagues and friends you are looking for an investor. If you talk about it to enough people, someone will eventually turn up.
Office of Economic Development
Offices of Economic Development are state entities that provide financing, and information on finding other sources of capital.
Economic Development gives money to a lot of technology and manufacturing businesses, but programs change annually, so check with your local office.
For example, if your town or city has high unemployment or low per capita income, you may be eligible for a loan because the state is encouraging businesses in your area. There is also often money for business start-ups in areas where a big company laid off a lot of people or where a military base has shut down.
[Check out the U.S. Economic Development Administration's (EDA) list of State and Local Economic Development Agencies].
Angels are people with money who are looking for an investment that will give them a better return than traditional investments.
Angels provide sums of money in the under-$200,000 range and tend to invest in their home state or region. In fact, the vast majority of angel investments are made within 50 miles of the investor's home or office.
Angels will expect, roughly, a 25% annual return on an investment and accept an average of three deals for every ten considered. Investment opportunities are turned down most often because a company has insufficient growth potential, overpriced equity, lack of management talent, or there is a lack of information about the entrepreneur or other personnel.
Angel Networks are organizations that show your business plan to their investors and charge a fee for it. Fees can range from $25 to $2000 but will probably be in the $500 range.
Grants are available most frequently to non-profit companies, although some grants exist for "for-profit" companies.
What is almost impossible to come by is a grant for a business start-up. Most grants are made available for the development of a product or service that will benefit the public or will generate a product or service the government needs.
The Federal Register, published weekdays by the federal government, has grant announcements. You can find the Federal Register in university and most public libraries or by visiting The Federal Register website.
The Catalog of Federal Domestic Assistance also contains grant information.
The CFDA can be found in large public libraries or by visiting the CFDA website.
Some state and local governments have grant money, or act as clearing houses for federal funds. Contact your state or local office of economic development to find out about these possibilities.
The Small Business Innovation Research Award Program (SBIR) provides grants to technology-related businesses that address the needs of the government. Federal agencies that participate in the SBIR program select research topics and publish them in the SBIR Presolicitation Announcement which is published quarterly. Companies interested in doing the research contact the agency requesting it and submit a formal proposal showing how their company would complete the project. A proposal preparation handbook is available by contacting the SBA.
For more information on SBIR visit their website.
To get a copy of the SBIR Pre-Solicitation Announcement, contact the Office of Innovation, Research, and Technology at the SBA and ask to be put on the mailing list for the SBA/SBIR Pre-Solicitation Announcement mailing list
Make certain any bank you approach really does care about supporting growing businesses. One way to do that is to find out whether it's a certified Small Business Administration lender-even if you're not in the market for an SBA loan.
There are two basic types of loans you might want to consider:
Most small business loans are secured with company or personal assets. Lenders will usually ask for personal guarantees, as well as collateral from anyone who owns more than 20 percent of the company. The bank's intent by requiring all this is, in part, to gauge whether you think your company is worth the risk you are asking them to take. Business loans have more strict requirements than consumer loans. For example, if your business is in tough financial times, your bank may ask you to immediately pay off the full amount of the loan, something that is unlikely to happen with a consumer loan.
Lots of small businesses are funded through personal loans or other loans based on personal assets. Consumer loans - home equity loans, second mortgages, mortgage refinancing, and personal loans - are easier to obtain than business loans if you have a healthy credit history. Some banks don't mind if you take a consumer loan and use the funds for business purposes, others will refuse to lend to you if you tell them you need the money for business purposes. Keep in mind that if you tell a banker a loan is for personal use and you use it for business, that lie constitutes an act of fraud.
Consumer loans require less paperwork than commercial loans, and the approval process is much quicker. It is also unlikely that you would be asked to pay the loan back in full if your business falls on hard times, something that can and does happen with a business loan. Among the types of consumer loans are:
Commercial Finance Companies are the companies that make many car loans.
They take on higher risk commercial loans than banks and can handle commercial loans. If your small business will continually need your loan ceiling increased, a finance company may be your best bet. Some of the situations that may precipitate your need to go to a finance company are: your company is high-growth and will continually need its loan ceiling raised; your credit history is spotty; or your company has a high debt-to-worth ratio with a strong cash flow.
With risk usually goes higher costs and finance companies are no exception. Rates and fees will be about 2-10 percent higher than banks. Finance companies tend to favor deals of $500,000 or more.
The Small Business Administration
The SBA works as both guarantor on loans to small businesses as well as a lender.
A list of lenders authorized by the SBA is available by calling 800-827-5722. If you are pursuing an SBA guaranteed loan you should find out what lenders in your area work with the SBA and work through them. Funds guaranteed or provided by the SBA may be used to build or start a business, not as a means of paying off creditors, to cash out investors, or for investment in real estate, among some other restrictions. Qualifications for an SBA loan change over time and with the nature of your business, but general guidelines for qualifying are listed below:
Small Business Guide
- Starting Up Your Business
- Structuring The Business
- Creating a Business Plan
- Your Company's Public Relations
- Effective Competitive Analysis
- Managing Purchasing to Maximize Cash Flow
- Bidding Basics
- Hiring Staff
- Small Business Insurance
- Small Business Resources
- Vacations and Taking Time Off
- Preparing for Tax Season
- Cash Flow
- Your Company's Credit
- Getting Funding
- Employee Compensation