Where can I get money?
Q: I would like to start a new business, but don’t have the money to finance it myself. Where can I get the money?
Show me the money! is a request heard daily in the Small Business & Technology Development Center offices. The word on the street must be that I have a stash of money in my desk drawer ready to hand out to worthy businesses and start-ups. The reality of the situation is that I have no hard cash, but I have an abundance of information on where you could locate some money.
Before you get too excited, please realize that most sources of financing are loans, not grants. This means you have to pay this money back with interest. Second, in most situations, a business plan needs to be created for your new venture before financial backers will even consider lending you money. (This is usually where I get a big moan from my clients.)
Writing a business plan is not as difficult as you may think. A business plan communicates your vision to others in a simple, straightforward manner. It briefly describes the five Ws:
- What is your new business?
- Who will run it?
- When will it be in operation?
- Where will it be located?
- Why will it be profitable?
You need to prove to the lender that your business will succeed based on facts and educated assumptions, not wishful thinking. This can be achieved by researching the market, establishing a budget, projecting your sales and analyzing the competition and industry trends. For a more in-depth discussion of business plans, see Doing Business in Missouri: Business Plan.
The sources of funding available to a business are:
Believe it or not, the most common source of financing a startup business is the individual investing in it. There are many advantages to using your own money to start the venture. You maintain control of the business while utilizing the cheapest form of financing available. The cost to you is whatever you would have made on your money by investing it in other sources. If you don’t have the money now, maybe you need to wait a year or two and save the money before starting the business.
- Friendly money.
The second most common source is “friendly money” obtained by contacting people you know and asking them to invest, especially when the capital requirements are small. Think about contacting relatives, friends, business associates and other private sources that believe in you and your business idea. If they do not have much money in savings, they may have other assets that can be converted into cash. This may be the least costly in terms of dollars, but may become the most costly in terms of personal relationships if your repayment schedule is not timely or your venture does not work out. If you are raising money from friends and family, structure the deal professionally by signing a note or other type of agreement concerning the terms of the loan.
- Traditional lending institutions.
Banks, savings and loans and commercial finance companies have long been major sources of financing. These institutions are looking for loans that will be paid back in a timely fashion and for loan applicants who show a commitment to their new venture by putting some of their own money or equity on the line. Banks usually like to see between 20-30 percent of the total project cost to come from the business owner. In a business startup situation, banks usually require the business owner to guarantee the loan with personal assets because the business has no track record. If you know you will need bank financing, bring the banker in early in the process, before you complete your business plan. If possible, establish a banking relationship with a potential lender long before you need a loan.
- Outside lenders, venture capitalists.
Traditionally, the most expensive lender is the outside lender who charges a high interest rate because of the risk involved. A venture capitalist usually requires a percentage of your business or a high return on his investment. This may be an option if your business has substantial startup costs and will show a good return on investment.
- Government loan programs.
Certain government programs help guarantee loans made through banks. These Small Business Administration loans guarantee 75-80 percent of the loan amount to the bank if you default, so it makes your loan more attractive to the bank. There are also low interest revolving loans available in this area. These usually require a business plan, a minimum requirement of 10 percent or more of the startup costs and additional paperwork.
Crowdfunding is the latest buzz in entrepreneurship funding. Sites like Kickstarter and Indiegogo are not just a cool way to help a friend launch a passion project or support the comeback of a cult TV favorite anymore. They are established, regulated, high-potential, high-growth investment marketplaces with worldwide public access. Just be aware that crowdfunding is an alternative, not a replacement for VC. It may be a viable way to bypass old school venture capital, but it’s not magic: One in four prospective projects are rejected on Kickstarter, one in 10 accepted projects receive zero dollars, and the failure rate is 56 percent. It’s hard work. You have to pay legal and site fees, and more investors means more backend work. Having hundreds or thousands of investors can be just as restrictive as having a single investor. Engagement doesn’t end when the target goal is reached. It’s just begun.
Running a successful business requires diligence, hard work, vision and a willingness to ask for help when it’s needed. And that help is available by contacting the Missouri Small Business & Technology Development Centers.