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Financing Your
Home Business
by 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 cash flow 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 on charging 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 grant makers make grants available for
small business though. For more information, visit http://www.fdncenter.org/funders/grantmaker/index.html.
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 travelers 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. The website is at https://acenet.sr.unh.edu/pub/.
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 cash flow) can support it.
After all, Uncle Jack is much more likely to be
understanding about the occasional cash flow crunch than
Uncle Sam.
Elena Fawkner is editor of A Home-Based Business Online ...
practical home business ideas for the work-from-home
entrepreneur. Visit http://www.ahbbo.com
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