Finance for Business

Sources of  Money

1. Bootstrapping
2. Investment Equity
3. Non Profit Lenders
4. Banks
5. Small Business Administration
6. Angels
7. Grants

This means starting on your own with no outside money. You would use personal savings, and might need to adjust your living allowance, in order to fund the start-up costs of the business. Beware of credit cards! Many people think this is a quick and easy way to get the money they need, but they end up spending large amounts on the interest payments. If you do use one there are credit  firms that waiver 1st year interest charges such as american express or advanta.

Advantage: No reliance on an outside sources of money, complete independence in how you operate the business.

Disadvantage: The business may be under-funded and may not have the support it needs to get off the ground. Also, many people chose not to write a business plan when they use their own money. Lack of a plan increases the chance of failure because the business is less likely to be well researched and analyzed, and because there are fewer opportunities for outside feedback about the project.

Investment Equity:

Having other people invest in your company. They may be friends, relatives, or just people willing to take a chance on your idea. You may have one or many investors. Make sure you always have the terms of your agreement clearly defined, preferably by a legal document.

Advantage: You get access to necessary funding from people who are supportive of your business.

Disadvantage: Could strain personal relationships.

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Nonprofit Lenders:

Because many people are unable to get bank loans, a number of nonprofit lenders were founded to fill in the gaps. Such lenders consider a broader range of criteria (like personal commitment to the business, character, etc.) when evaluating an application. They may have special businesses they give preference too, e.g. rural businesses, women-owned businesses, etc. Like a bank, they also require a business plan and an interview, but they are willing to take more risks.

Advantage: Greater chance of getting the money you need. Positive history with a nonprofit lender will make it more likely you can get a bank loan in the future.

Disadvantage: It could take 1-3 months to get your application approved.

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Their job is to invest money. This may be one of the fastest ways to get money, if you already have a business plan put together. Banks want to be sure to get their money back, so they have a conservative lending approach. They require proof, through a business plan, that you have a solid idea and the ability to carry it out. They want to see that you have collateral, or something of value to hold against the loan. They often insist that you share the risk by putting up some of your own money. Also, they are more likely to fund existing businesses. Banks usually avoid very small business loans, but you may be able to get a line of credit or take out a home equity loan to cover startup expenses under $5,000. It is important to establish a personal relationship with your bank, and the earlier the better.

Advantage: Can get large sums of money relatively quickly while maintaining total control over the business.

Disadvantage: You may not meet bank guidelines because of your income, your assets, your type of business, your past experience, etc.

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Small Business Administration:

Basic Lending Criteria

The SBA provides guarantees for certain loans granted through the banks. There are a number of special programs that have specific eligibility requirements. You should ask your banker when applying for a bank loan if you qualify for any SBA loan programs.

Advantage: Increases your chances of getting a bank loan.

Disadvantage: You may still not meet the bank's guidelines because of your income, your assets, your type of business, your past experience, etc.

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Angels:

'Angels' are people who give you money. These are usually very wealthy individuals who invest their money in promising businesses. Usually they support businesses that have relatively large capital requirements and expect a high return on investment. They are difficult to find, and are usually introduced to you through word of mouth and personal relationships. They would then evaluate your business plan and decide if you are a good investment.

Advantage: A large sum of money that you may not be able to get elsewhere, with more flexible re-payment terms.

Disadvantage: Very unlikely to find, and may require giving up some control over the business.

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Grants: 

This was a popular way to encourage entrepreneurs in the early 70's, but they are now given mostly to nonprofit lenders to re-circulate.

The U.S. Government understands small business is essential to a vibrant economy. Small business grants are available to start a new business or expand an existing one, equipment financing, acquisition of a new or existing business, rent, salaries, office expenses, overheads. See gov.grants

To help citizens sift through and select which of the 1,500 grants they qualify for, several companies have produced Government Grant Guides. These guides help grant seekers determine which grants they qualify for and how to apply.  See www.unclesamsmoney.com

There are also many programs available to help women start and operate their own businesses. Government grants are cash gifts dispensed by the US Government . They are given as incentives to promote everything from home ownership, starting new businesses that create jobs, higher education, and opportunities for women and minorities.

To qualify, you must be a US citizen and 18 years of age.

A relatively new approach to getting "grant" money for your business is to enroll in an Individual Development Account (IDA) program. IDA's usually require you to participate in a classroom training on basic personal financial management and budgeting which runs concurrently with a "matched" savings program. The savings program could last one to three years, with participants making monthly savings deposits to a special account. For every dollar saved, you ultimately receive (at least) a dollar added to your account for use towards your business (or other eligible expense).

Advantage: Money that you don't have to pay back. With IDA you get invaluable financial management training.

Disadvantage: Very limited opportunities to get this sort of money, and when available it is only in very small amounts. Cannot be relied upon to fund all the costs of business startup.

ACCION USA borrowers:

• are 61 percent Hispanic
• are 27 percent African-American
• are 40 percent female 
• are 55 percent low-income by federal HUD/CDFI standards (earning 80 percent or less of area median income) 
• often rely on their microbusiness for 50 percent or more of their family income 
• often have business assets of less than $5,000 
• often have no personal or business credit or have bad credit prior to receiving an ACCION loan

Loan Amounts, Interest Rates and Terms

· Loan amounts range from $500 to $25,000

· Annual interest rate as low as 10%

· Loan terms up to 60 months

· Loan types include installment, balloon loans, and lines of credit

· Loan purpose ranges from inventory and equipment purchase to business marketing, payment of licensing fees, and other expenses associated with building a business

· Money in your hands  (or loans disbursed) in 5 to 20 business days upon receipt of your completed application and all supporting documents

· Minimal application documents—less than banks require

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