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Start It Up: Track down money for your new business

By Brandon Goldner on February 1st, 2011 • Business loan, Investing, Starting a business, Entrepreneurship
Originally appeared in: Spring 2011

Many of us dream of becoming our own boss, but there's a lot more to starting your own business than finding a space and setting hours. Even the greatest idea in the world needs to be paid for. It will be a challenge, but persistence and diligence in pursuing capital will get your idea from the drawing board to opening day.

Getting the crucial facts straight

About 50% of small businesses fail within the first five years--many of them tripped up by insufficient capital and poor credit arrangements. Before you can figure out the best ways to finance your business, ask some important questions:

  • How will you use the capital? Lenders and investors aren't going to accept "I don't know" for an answer when approaching them with your hand out. Targeting specific needs and goals is the first step in successfully asking for financial assistance.
  • What's the condition of the industry? It might be easier to find financing for a deli shop in a big city than for a piano repair shop in a small town. Having a more unique business will make financing more difficult, but not impossible.
  • Is the money needed right now? There's nothing wrong with wanting to get started right away, but lenders are more apt to be flexible with terms when they have a chance to deliberate rather than being put under the gun.

Your business plan--an important part of any business--will cover some of these answers in greater detail.

Where to turn

Now that you have a plan, it's time to get out and ask for help. One of the best places to start is right up your family tree. Family members can provide crucial funding right out of the gate and may not expect to make a large return on their investment. Create a loan agreement where all the loan terms, payments, and interest rate expectations are clearly spelled out--remember that even though the money is coming from grandma, it's still a business contract.

In case there isn't enough cash in the gene pool, you'll need to look elsewhere. Angel investors offer help when the company is just getting started, and don't expect to see a return right off the bat. Just be prepared for a trade-off: entrepreneurs will have to give up some control in return for the investors' generosity--often at least 10% of the company's equity, sometimes as much as 50%. Look for angel investors at universities, business incubators (try nbia.org), and wherever the scent of a fresh dollar bill hangs in the air. Visit angelcapitalassociation.org for more info.

Venture capitalists are at the top of the investor food chain: they can provide large amounts of money, but they're also going to want a large share of control in the company. If you're wary of venture capital, keep in mind that it might be better than going into debt, and that many successful companies (like Google and Starbucks) benefited from some extra help from investors. For more, check out the National Venture Capital Association at nvca.org.

It's important to keep your attitude positive and your energy high, not only because finding the right lenders is a challenge, but because others will feed off your energy. Whether you're the image of determined optimism or reluctant defeat is totally up to you.

Don't groan at loans

Most small businesses need loans to get off the ground, and if borrowing seems inevitable, check out the Small Business Administration (sba.gov). The SBA is a government organization that can guarantee up to 80% ($1 million max) of loan principal for loans from private lenders. Before rushing out to apply, remember that loans create debt, need to be repaid and can affect your credit score. If you're willing to do the paperwork and take the risk, these loans might be an effective way of getting your business off the ground.

The Bottom Line

Despite the recession, 558,000 new U.S. businesses were started per month in 2009. The only thing stopping you from flinging open the doors to your new company is research, planning, and a lot of hard work.

Sources: sba.gov; findlaw.com; angelcapitalassociation.org; entrepreneur.com; google.com; mhhe.com; kauffman.org

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