Constructing Your Business – Chapter Three
Chapter Three – The Roofing
“The man who does not work for the love of work but only for money is not likely to make money nor find much fun in life”. Charles M. Schwab
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The best protection a home has from uncertain weather is the roof. For a business the roof is finances. How much money will your business need at start-up and to operate for three to six months? As a business owner, can you continue your financial obligations even if no income is available? How much money do you have available for an initial investment?
What do you have to invest?
The best time to look for funds is prior to opening for business. The first step is to determine how much money you as the business owner have to use as an initial investment. As a service business, less start-up capital is required. Here are a few suggestions to keeping start-up costs low and using what is available to you as a business owner.
- Furniture and equipment – look around at your home and see if there are items that may be used in your office. If you have a home computer, consider moving it to the office since that will be where it’s needed most. Look at end tables, chairs, desks. These items can always be replaced or upgraded when income increases.
- Credit cards – when purchasing items, use a low interest rate credit card for deferred payments. Consider getting a card with points or cash back rebates for additional benefits.
- Home equity – many banks are offering attractive low interest equity lines of credit. Generally there are two types: lump sum and check-book style lines of credit. Consider which option will be best for your business.
- Thrift Stores and Discount Warehouses – search for good quality, low cost items at non-mainstream stores. Buying a case of copy paper is cheaper at a warehouse then at a general supply store. Shop for the best discounts and ask when certain items will go on sale.
Lenders like to know how much the business owner is investing in their company. Make sure to keep track of all the money spent, assets owned and funds available for your financial statement.
Family & Friends
Borrowing money from friends and family can be either a good venture or a touchy situation. People that know you are sometimes more willing to lend money then a banker looking solely at your business plan. But if you feel borrowing from someone you know will add tension to your relationship, it would probably be wise to seek funds elsewhere.
If you are going to approach your family or friends, keep in mind the following:
- Keep it business oriented. Call them and ask to schedule some time to see them to discuss the proposal.
- Show them your business plan. Allow them ample time to read and ask questions about your business.
- Financial terms. Know ahead of time how much you will be asking for, the interest rate and repayment length. Have an amortization schedule available.
- Formalize the agreement. Put everything in writing to help clarify the terms.
Investors
Because start-up costs and on-going expenses for a service oriented business are less costly than manufacturing, private investors are a good source for additional funds. Most investors are individuals who are interested in new start-up businesses. A good source for finding an investor is to ask other professionals, attorneys, accountants or through a venture capital meeting.
Investors will want to look at your business plan just like a conventional lender. Unlike a bank, a private investor usually offers cash in stages. For example, instead of a lump sum, an investor may offer a specific dollar amount on a quarterly basis if certain sales are met. And because an investor is taking a personal risk, interest rates are usually higher than a conventional lender. Again, make sure that any agreement is in writing, and have your attorney review any documents prior to signing.
Conventional Loans
If approaching a bank for a loan remember the rule of “C’s”
- Capital – personal investment
- Collateral – assets available
- Character – personal experience and reputation
- Credit worthiness – your current credit score and repayment ability
- Circumstances – the business and the demand for its services
Your lender will want to review your business plan, see past financial statements, review a credit report and check any references. Sometimes this process can take a while so don’t wait until the last minute to approach the lender.
To save time, start with the bank you currently do business with. Call them to find out the following criteria:
- Amount of loans – minimum and maximum
- Usage – what can funds be used for
- Business loans – what type of businesses do they deal with
- Commercial vs. Personal – discuss the advantages/disadvantages of both
Be prepared when meeting with the loan officer. Have all material readily available. Be able to give a 3-5 minute brief on your business and why you need the funds. Remember that banks make their money by lending. Don’t be afraid to negotiate rates and terms. And feel free to shop around for the best deal.
Government Money and Grants
As the old saying goes “there is no free lunch” the same is true with free money. There are many websites offering software and services to secure free government money. Be aware that most grants are offered few and far between with a long and lengthy proposal process.
That said, the Small Business Administration (SBA) is a federal agency designed to assist entrepreneurs with both business advice and financial aid. If approaching the SBA for funding, keep in mind they will want to see all the information that a conventional lender would want to review, your business plan, financial statements, credit worthiness and character. The SBA will also want to know whether or not you approached any commercial lenders first and what the results were.
The SBA’s main loan program is the 7(a) Loan Guaranty Program – which is when another lender carries the loan and the SBA guarantees up to 90 percent, making it more attractive to the lender.
The other programs consist of the Low Doc Loan ($100,000 or less) which is less paperwork and can be processed quickly, and the Microloan Program ($25,000 or less) which is supported generally by non-profit organizations and has a short repayment period.
Preparation is very important with both the SBA and the conventional lender. Be ready to answer questions about the business, potential growth, your expertise, owner capital and other topics explaining why you need funding. The SBA may also require you to attend their business start-up workshop as well.
Whether you will be needing start-up or operating funds for your business, or plan to use personal assets, knowing where and how to obtain financing is beneficial. If needing money arises due to expansion, hiring or changing locations, you’ll be prepared to approach a lender with confidence.
Blue-Prints
The number one reason why new businesses fail is due to lack of funding. Make sure you have the money necessary to start and maintain your business prior to opening your doors. Some questions to ask are:
- How much money is needed to start the business?
- What items needed for my business do I already have?
- What lines of credit do I currently have available?
- Is there anyone I would approach as an investor?
- What are the terms of commercial loans offered at my bank?
- Have I reviewed my credit report for worthiness?
For further financing information, check the following sites:
Business Funding Directory
All Business Financing