Raising Money for Your Business 2
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Where do I get the money to start a business?
Most people get the money to start a business from their personal savings, by taking out personal loans or second mortgages on their homes, and/or by using charge cards to pay for equipment or supplies. Equipment leases and vendor credit may be possible, too. Family and friends or other private investors are also common sources of start-up funds. Sometimes the amount of cash actually needed to start a business can be reduced by bartering or by working out some type of business deal with other individuals or businesses.
On rare occasions a manufacturer, supplier, or even a successful entrepreneur provides some start-up funds, equipment, building, or space. This type of opportunity is one you can't really search out, however. What usually happens is that someone with money or equipment spots a bright, industrious, inquisitive employee and figures that the employee has what it takes to build a new business or take over an existing one.
What kind of deals could be used in place of money to help start a business?
One type of deal is a sweat equity arrangement, which is basically an exchange of work for ownership in the start-up company. In other words, one person agrees to work for free or at a lower salary than normal and, in exchange, gets partial ownership of the business. A different type of arrangement, also beneficial, is one in which an existing business provides certain services for free for a start-up in exchange for a guarantee of future work if the start-up is successful.
Ben Mandell, an entrepreneur who has built several successful businesses, used this technique to produce the pilots he needed for a TV game show he was producing. He got a lower rate for the pilots with an express written understanding that he would shoot 130 shows at their studio, and pay their daily studio fee, if and when the show is sold. "I have a producer I have worked with before. He will produce a pilot at no cost to me. If the show is sold, he will produce all of the shows the first season," Mandel worked out similar deals with other suppliers as well.
Will the bank give me a loan to start a business?
Getting a local branch of a bank to give you a loan to start a business can be difficult. Banks are very conservative and are often reluctant to deal with start-up businesses, particularly if the owner has little or no experience running a business. If you have a good business plan and a good credit history, you may be able to find a bank willing to work with you, though you may have to shop around for the right bank. If you can't get a business loan you may be able to get a personal loan or a home equity loan or line of credit. (A line of credit is an agreed-upon amount of money you can borrow when needed.)
How does a bank decide whether or not to approve a business loan?
The bank will want to know how much money you are requesting, how you will use the money, and how you will be able to repay it. They need assurance that you and any other owners have the management experience and commitment necessary to run the business. They'll expect you and any other principal owners to have invested a significant amount of your own money in the business. Generally banks will expect the owner(s) to have an investment in the business equal to between one-third and one-half the amount of the loan requested.
The way to present all this information to banks is by preparing a loan proposal that includes these elements:
- business name and address
- name, address, and Social Security number of each owner of the business
- exact amount of the loan
- purpose of the loan
- financial statements for the last three years or, if the business is just starting, projections of financial data for three years
- business tax returns for the last three years if available
- tax returns and financial statements for each of the business owners for the last three years
- information about the company's market (how large it is, if the market is growing, who the typical customer is, how your business meets customers' needs)
- business profiles of the owners of the company, indicating management experience, special industry knowledge, skills, education, accomplishments
- an indication of what collateral the owner(s) is willing to pledge as security for the loan (collateral is any asset the bank could take over to get its money back if you can't pay off the loan, such as cash, stocks, real estate, and inventory)
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