Show me the money!
How to finance your small business
The truth is there is a lot of misinformation out there with regard to financing your small business. From legitimate-looking websites guaranteeing financing for a small upfront fee to late night infomercials that suggest the government is having trouble finding businesses to give money to, entrepreneurs beware. After 23 year of working with small business owners to finance the start up and expansion of their businesses, I can honestly say I don’t know of any grants to start your small business. But I do know of several funding options to help finance your entrepreneurship dream.
Here are the sources of funding available to most businesses:
- The owner. Beyond this being the most common funding source, it is also almost always required to acquire additional financing from other sources. Typically, business owners are asked to support their business with a 20-30 percent owner equity position at the start of their business. Using 25 percent as an average, if the owner needed $100,000 to fund their business, then $25,000 would come from the owner and the remainder could be financed. Bankers do not consider themselves owners of your business, nor do you want them to be; however, they do expect you to have some skin in the game and won’t consider it a reasonable proposal without it. If you don’t have the cash available to inject into your business, you might consider waiting until you do, or look to the next resource: family and friends.
- Family and friends. You will always be family, but you may never be friends again! My biggest piece of advice here is to treat the transaction as a professional business contract. That means spelling out the conditions of the agreement before any financing is secured by using the services of an attorney or at least writing it down to document the terms. One of the biggest decisions will center on the determination of whether the money is equity — the family member or friend acquires some ownership in the business — or if the money is just a loan. Subsequently, conventional financing sources typically require personal guarantees from anyone owning 20 percent or more of the business. This may not be what Uncle Max had in mind.
- Traditional bank financing. Our southwest Missouri community is fortunate to have a robust lending group of banks. Bankers look at the five Cs of credit: Character, primarily your credit history; Capacity, your ability to pay back the loan; Capital, other resources to pay back the loan; Conditions, your business experience and the economic climate of your industry; and Collateral, additional guarantees that could be used to repay the financing such as the next resource, government backed loan programs.
- Government backed loan programs. The most well-known and locally used program is the Small Business Administration’s Guaranteed Loan Program. The key here is the bank is guaranteed 50-90 percent of your loan should you default. Under this program, the bank actually makes and administers the loan; therefore, the bank decides if they want to apply to the SBA for a guarantee.
- Venture capitalists and angel investors. This is not a resource for the novice and is a sophisticated setup. Generally, these folks make equity or ownership investments and not loans. They are looking for a high rate of return and a project that is scalable with a big niche market.
- Crowdfunding. Created out of the JOBS ACT, this may be one of the most exciting changes in business financing since the Great Depression when businesses were restricted from soliciting money without mounds of paperwork. Today, businesses may seek cash using investment platforms designed for securities, generally called crowdfunding. By the end of this year, crowdfunding companies expect the Securities and Exchange Commission to have delivered the rules to allow funders to acquire an ownership position in the company. We are fortunate to have Crowdit, a crowdfunding business platform, in Springfield, located at Missouri State University’s eFactory.
For personalized help exploring business ideas, marketing, finance, management, technology, international trade, growth or other business issues, contact a business specialist at a center near you. Or visit the full list of training courses to find an upcoming training seminar.
This article first appeared in the Springfield News-Leader and News-Leader.com. Used with permission.
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