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Home > Articles > Finance >Financing Your Business

FINANCING YOUR SMALL BUSINESS

by Brett Krkosska

Finding the capital you need to finance your business can be a confusing and complicated process. Many great ideas stumble at this stage of business building.

Yet, moving through this stage breathes life into your business - giving it forward momentum like a roller coaster barreling down the first big hill. Finding money is just a matter of being informed and choosing the right path for money to enter the business.

There are several options available to you when searching for financing.

Some methods of raising funds are less difficult than others, but all require some planning. Basic planning requires that you know the answer to these three questions:

1. What will you use the money for?

You must know exactly where the money will be used. You must be specific, as generalities are recipes for disaster. Carefully identify the areas where money should flow into your business.

2. How much money do you need?

You should calculate your needs to carry you through initial startup and into your first several months of operation. It's necessary to have a realistic picture of your needs. Many businesses fail because the money runs out before the business reaches profitability.

3. How will you pay back the money?

You must have adequate cash flow from your business to repay the money to your source. Before asking for funds, make sure your fiscal projections and business integrity are soundly argued in a good business plan.

An integral part of a good business plan are financial statements for your business. You need to show sufficient cash flow in your business for repayment. You do this with information as found in an income statement, a balance sheet, and a projected cash flow statement.

SOURCES OF MONEY

Here are some options for funding your small business:

==> Credit Cards

One form of personal debt you should avoid is cash advances on your credit card. It's very tempting and very easy to get cash this way. If you do this you should pray. Pray with vigor. Then ask for forgiveness. This option is very expensive and extremely risky. Credit cards should only be used for short-term expenses, and not as a means to entirely fund a start-up business.

==> Friends and Family

Borrowing from your friends and family, especially the rich ones, is a good way for new businesses to get money. It's not uncommon for relatives to make low interest or no interest loans to family members. Just make sure all parties are aware of any risks. You don't want to alienate your family if the business falls on hard times and you have trouble repaying the loan.

==> Personal Savings

You can use your personal savings or assets that can be converted to cash. If your savings are already low, put off that vacation, drive your old car a bit longer, avoid large purchases -- be thrifty in all areas and you can save faster for your business. Keep in mind that most lenders won't finance 100 percent of your business, so you'll need to invest some money yourself.

==> Line of Credit

If you have good credit, you may be able secure a line of credit from your bank. This can be handy in providing you with a source of working capital in the opening round of your business.

==> Bank Loan

Using collateral, such as the equity in your home, you can approach your bank for a loan against your business. This may or may not be an option for you, since some banks prefer to separate personal equity from business debt.

==> Venture Capital

People with lots of money love to make lots more money. Your job is to convince venture capital providers that you and your business can help them make lots more money.

You must be able to show you've got a real winner. You must do it without fluff or a "come on, dream with me" embellishment. Therefore, you need a business plan. A good one that shows you've done your homework and know the "lay of the land."

Venture capital providers want to be sure their investment is sound. They generally do this by taking ownership over a pretty big part of the company, and often require control of major portions of the business. This is so they can look after their investment.

Do they mess around with the little guy? On the whole, they don't want to fool around with little investments and they are bully on companies that have high-growth potential. Gotta think big with these guys!

A few sites that help businesses and capital providers meet are vCapital.com, BusinessFinance.com, and vFinance.com.

==> Angels

An angel, or private investor, is a person looking for good investment vehicles. This person could be your next door neighbor, your dentist, or a local business owner. Overall, angels are not loan-makers, they are investors. As such, the degree of control and terms under which you receive seed money for your business will depend on the arrangement brokered between you and your angel.

The key to finding an angel in your area is networking. While you may not have an angel in your personal pool of contacts, by networking with others you can create a word of mouth campaign that reaches the ears of private investors.

Moving outside of your local area, you can begin a sweeping search for private investors at BusinessFinance.com. They maintain a list of thousands of potential investors.

==> SBA Microloans

The Small Business Administration may be helpful in connecting you with a Microloan. These loans are administered by non-profit organizations that want to foster economic development in your area. Contact your regional SBA office for information on this loan program. You can find your local office using this online locator: http://www.sba.gov/regions/states.html

==> Small Business Investment Companies

The SBA or your local Chamber of Commerce may be aware of Small Business Investment Corporations operating in your area. These organizations are interested in reviving depressed portions of your community, bringing employment to places with high unemployment, or even helping certain minority groups. They will work with new businesses if you meet the criteria they expect. You can visit the American Economic Development Council for a list of organizations in your area: http://www.aedc.org/

==> Business Incubators

Business Incubators help build new businesses. They can provide help in all phases of start-up, including funding. Investigate whether or not an incubator exists in your area with the SBA, Chamber of Commerce, local universities, or your local municipality.

==> Your Future Customers

Your future customers may be a source of money. This is a less conventional method, and your timing must be right to coordinate this type of deal. You simply take advance orders for your product and collect at the time of the order. If you take enough orders, you can search for a lending institution which makes loans against accounts receivable.

In the final analysis, the name of the game is perseverance. Get your name and idea out there in the real world. Start talking to people about your intent and become a player. Have your business plan ready, be aggressive, and you can get the money you need.

~ Our Contributing Writer ~
Brett Krkosska, Douglass, KS USA
brett@homebiztools.com
http://www.homebiztools.com/