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Small Business Financing, Loans and Venture Capital



Another AHBBO Article
Financing Your Home Business

© 2016 Elena Fawkner

So, you have a great idea for a business and, more importantly,
the know-how to bring it into creation.  The only thing you’re
missing is the cold hard cash to get started.  What are your
options? 

Assuming you don’t have a ready line of credit, an expansive
bank manager, wealthy relatives or a substantial stash of
retirement savings you’re willing to risk,  you’re going to have to
do some serious homework and legwork.  Fortunately, there
are a number of sources of finance for the fledgling small business
entrepreneur, at least one of which may be right for you.


SBA LOANS

Available only to U.S.-based businesses (but look for similar
programs in your own country if you’re outside the U.S.), the SBA
(the U.S. Small Business Administration) has assisted thousands
of entrepreneurs start their own small businesses.  The SBA
doesn’t issue grants (money you don’t have to pay back) or make
loans directly, rather, it guarantees loans made by private lenders
thereby reducing or eliminating the risk inherent in new business
ventures and making lenders more willing to lend.

The primary consideration for the SBA is repayment ability from the
cashflow of the business as well as “good character, management
capability, collateral and owner’s equity”.  You will be expected to
personally guarantee your loan.  This means your personal assets
are at risk.

As for the types of businesses eligible for SBA loans, the SBA
imposes the following criteria: the business must be “for-profit” (all
that means is that your business has a profit motive, not that it 
has actually generated a profit yet), be engaged in business in the
United States, there must be “reasonable” owner equity (what’s
reasonable will depend on the circumstances) and you are expected
to use alternative financial resources first, including your own assets
where practicable.

The SBA also imposes limitations on the use of loan proceeds. 
For example, although the proceeds can be used for most business
purposes (the examples given by the SBA include “the purchase of
real estate to house the business operations; construction,
renovation or leasehold improvements; acquisition of furniture,
fixtures, machinery and equipment; purchase of inventory; and
working capital”), you can’t use the loan proceeds for financing
floor plan needs, to pay existing debt, to make payments to the
business owners or to pay delinquent taxes etc.

As a general rule, loans for working capital must be repaid within
seven years and loans for fixed assets must be paid for by the
end of the economic life of the assets (but not to exceed 25
years).

Interest rates are negotiated between the borrower and the lender
but the SBA imposes maxima which are pegged to the Prime
Rate.

Finally, the SBA charges lenders a guaranty and servicing fee for
each loan approved, and there is nothing preventing the lender
oncharging these fees to the borrower.  The guaranty fee for a loan
of $150,000 or less is 2% of the guaranteed amount; over $150,000
but below $700,000, it’s 3% and above $700,000 it’s 3.5%.  The
annual servicing fee is 0.5% which is calculated on the then-current
loan balance.

Where the borrower meets the SBA’s credit and eligibility
requirements, it will guarantee up to $85% of loans $150,000 and
less and up to 75% of loans above that amount (up to a maximum
of $1,000,000).

For more information about the various SBA loan programs, visit
the SBA website at  http://www.sba.gov.


PRIVATE GRANTS

At present, there are no U.S. government grants offered for small
business.  If you're outside the U.S. check with your own
government about the availability of small business grants.  You
never know! 

Various corporate grantmakers make grants available for small
business though.   For more information, visit
http://foundationcenter.org/find-funding .


ANGEL INVESTORS

Angel investors are good souls with a healthy sense of self-interest. 
Figuring they can get a higher return if they’re prepared to take a
bit of a risk, they’re also often successful entrepreneurs themselves
and want to give their fellow travellers a hand up.

Think of funding from an angel investor as a bridge or gap-filler
between being a start-up and qualifying for venture capital.  The
kinds of dollars we’re talking about here are between about
$150,000 and $1.5 million.  Beyond that point you’re in low
venture-capital territory.

The SBA estimates that there are around 250,000 angels in the
U.S., funding about 30,000 companies a year.  So, how do you
hook up with one?  Not an easy task, unfortunately.  It comes
down to networking.  Start by talking to professional and business
associates - they will often know someone who knows someone
etc..  Also, check out ACE-net if you’re prepared to sell a security
interest in your company.  It’s an internet-based listing service for
securities offerings of small, growing companies. 


VENTURE CAPITAL

You’re in the big leagues now.  Generally you’re in the ballpark
of millions (of dollars that is) rather than thousands.  Venture
capital firms look for their return on investment from capital
appreciation rather than interest (unlike banks, for example). 
They’re generally looking for a return of 500-1,000% on exit.

It won’t surprise you to learn that venture capitalists are particularly
leery of internet-based businesses right about now and not
surprising.  It also serves them right.  But if you have a solid
business plan and strong growth potential, this could be an option
for you longer term.

One of the common concerns about this form of financing, however,
is that you may have to part with an unacceptable amount of
control over your own business.  In return for their risk, venture
capital firms will usually want some control over how the business
is run and a say in business decisions.  A venture capitalist will
expect a seat on the board, for example.

It’s important to remember, though, that it’s in the venture
capitalist’s best interests for your business to succeed, so giving
up some control in exchange for outside expertise may well be
something worth thinking about.

To find venture capitalists, get a hold of “Pratt’s Guide to Venture
Capital Sources” for a listing of 1,500 or so including names,
contact details and areas of interest.  Of course, you'll find no
shortage of information online as well.


For most readers of this article, your best bet would be to start
out by investigating the various loan programs offered via the SBA
(or your country’s local equivalent).  But don’t overlook more
obvious, close to home sources first.  If you have family funds at
your disposal (for example) and you’re confident that your
business will succeed (and unless you're confident about that, don't
get into debt with *anyone*, let alone family members), better to
start out slow and ease into outside sources of financing as your
business (and, more importantly, your business’s cashflow) can
support it.  After all, Uncle Jack is much more likely to be
understanding about the occasional cashflow crunch than Uncle
Sam.

_________________________

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Elena Fawkner is editor of Home-Based Business Online. Best business ideas and opportunities for your home-based or online business.

Copyright 1998-2017, AHBBO.com. All rights are reserved. Tuesday, 24-Oct-2017 06:17:31 CDT