Where to find the money
Try a friend, or family member, or a loan if you can qualify
So you want to start a business. You've got a great idea, your business plan is mapped out, and all you need is money.
What worked for Bill Gates will most likely not work for someone opening a restaurant. Those with no business experience might have better luck looking for small loans and seeking money from family and friends. A savvy tech startup could have an easier time luring a venture capitalist. But even if you find investors willing to finance your dream, they may want you to give up management control.
Before you start exploring financing options, make sure you have a detailed business plan, as the rate of failure for new businesses is high. "The entrepreneur needs to figure out what they are going to sell, who will buy it and why, and how they are going to conduct the business and how much it will cost them to provide the product," says Jim Hammersley, director of loan programs at the Small Business Administration. Visit one of the SBA's 63 local small-business-development centers to get help.
There are basically three ways to finance a business: personal funds, taking on debt, and equity financing.
The first step is to figure out how much of your own money you can spare. Then you may want to approach family and friends before contacting banks and investors. "It's wise to tap a variety of financing sources," says David Hsu, a professor at the Wharton business school at the University of Pennsylvania. "That proves that you can convince a broad band of people that you have a good business idea." But make sure not to overextend yourself. "If your business takes a downturn, you should have a nest egg to fall back on," says Bob Walter, author of Financing Your Small Business.
Personal funds. Jessica Nickels, a 27-year-old mother of two, was working as a house cleaner last year when she decided to open up an eclectic store in Marietta, Ga. She put aside $200 a week to buy used clothing and other knickknacks. She partnered with a friend, who used his credit card to help pay the rent for what is now the thriving Kaleidoscopes Consignment Shop. "We've already turned a profit," she says.
Owners of smaller firms--those with sales under $500,000--and businesses under 10 years old are most likely to rely on credit cards, according to the National Federation of Independent Business. "A credit card with a $10,000 limit could provide you with enough working capital to purchase equipment or furniture, or pay for a marketing campaign," says Erin Fuller, executive director of the National Association of Women Business Owners.
Pay close attention to the interest rate when using credit cards, and pay off as much as you can, or you may thwart your ability to expand. "You might be less able to qualify for loans because you have already burdened your credit rating with high-interest-rate credit cards," says Maria Otero, president and founder of Women's Venture Fund in New York. Another option: a home equity loan.
Friends and family. Tori Stuart, president of Zoe Foods of Needham, Mass., got her natural-foods company off the ground in 2000 with the help of $150,000 pooled from several family members. Initially the deal was informal, with no paperwork, until they decided to turn the debt into an equity stake. "There was some back and forth, and we got it all in writing," says Stuart. Zoe Foods products are now sold in 2,300 stores nationwide and had revenues last year of about $2 million.
But think twice about involving family: "Do you really want your mom having a say in how you run your business?" asks Fuller of the women business owners group. She advises getting the terms in writing: "It could save that relationship down the road."
Bank loans. No matter how good your idea is, you must have a good credit history and business plan, little debt, solid business experience, and usually some collateral to get a bank loan. "Obviously, a start-up business is a risky proposition, so we need to be careful," says Rick McNutt, head of product management for Chase Small Business Financial Services. Small local banks are usually more likely to support local start-ups.
If you get rejected by banks, you may still qualify for loans guaranteed by the Small Business Administration. With an SBA-backed loan, you still submit the application to a lender, but it must be approved by the SBA in order to get the guarantee. "With us, if everything else looks good, except for the collateral, we'll go ahead with the loan," says the SBA's Hammersley.
Alex Nocifera of Redondo Beach, Calif., just received SBA approval on a $150,000 start-up loan. The funds will go toward payroll and hardware for ActiveMaps Inc., which will provide news, traffic, sports, and weather updates on flat-screen televisions in lobbies and gyms. The first bank Nocifera, 29, approached turned him down. But with the help of the local SBA office, he found a credit union to lend him money.
Nonprofits. Juan Altamirano was struggling last year to open up his restaurant, La Matagalpa, in downtown Miami. He needed money to install the kitchen stove, hood, and grill. Bank of America turned down his loan request. Desperate for an infusion of cash, he took out a $6,000 loan with a 20 percent interest rate. Then one of his employees told him about Accion USA, a nonprofit that provides loans under $25,000 to new businesses shunned by banks. Altamirano got a loan at 12 percent interest without having to offer collateral.
Unlike traditional lenders, Accion USA looks at more than just credit history and collateral. "We look for people who have a good idea and who have put some sweat equity into the business," says Bill Burrus, president and CEO of the Boston-based organization. Last year Accion USA, which relies on private donations, government grants, and low-interest loans from foundations and banks, loaned $20 million.
Other organizations, like ShoreBank Enterprise Cleveland, invest in small businesses operating in economically depressed communities. Ink Big, a Cleveland ink manufacturing company launched in 2002, received $250,000 in financing from ShoreBank to purchase equipment and for working capital. "We're not just looking to make money," says Barbara Nagy, finance team manager for ShoreBank. "We help companies that have the potential to create wealth and to create jobs."
Venture capital. Wealthy individual investors, known as angels, and venture capital firms differ from lenders in that they want a stake in your business in exchange for their money. But this kind of investor expects high returns, is concentrated in the high-tech industry, and also demands to play a more formal management role, including having a seat on your corporate board.
For some entrepreneurs, though, it's a plus if someone else wants to take over the day-to-day headaches of running a business. Pharmacologist Robert Raulli invented a new sterilization technology for medical equipment. He wanted to raise millions of dollars to develop his idea, so he networked with investors, who all told him again and again that he needed an experienced management team before he would get that much money. "I got the message," says Raulli. While several seasoned entrepreneurs and investors put together the business, Raulli faded into an advisory role. But he is happy with the way things worked out. "What I do best is . . . find innovative solutions to technical problems."
The Internet has made finding venture capital and angel investors easier (box). But you should also ask your local chamber of commerce or business development centers for names of local investors or venture capital firms. Roger Novak, cofounder of Novak-Biddle Venture Partners in Maryland, says to find out what companies they've helped. "Ask for references. Are they smart?" he says. "Will they coach and build the company?"
Whatever financing route you choose, in the long run it must be one that works for you. Starting a business is a very emotional and individual move. You are putting yourself, and quite possibly your livelihood, on the line. Pitfalls abound, so make sure you weigh all the options carefully. Your final choice should be the one that gives you the greatest odds of success.
Help is at hand
Some useful websites for the budding entrepreneur:
www.sba.gov/sbdc/sbdc near.html Where you can find the nearest small-business-development center.
www.accionusa.org This nonprofit organization can help with so-called micro loans for entrepreneurs who may not qualify for traditional loans.
www.mbda.gov For minority-business beginners.
http://acenet.csusb.edu You might find a rich individual, or "angel," investor here.
www.findingmoney.com, www.privateequity.com, www.nvca.org, www.springboardenter prises.org These are all sites where you can search for venture capital.
Help is at hand
Some useful websites for the budding entrepreneur:
www.sba.gov/sbdc/sbdcnear.html Where you can find the nearest small-business-development center.
www.accionusa.org This nonprofit organization can help with so-called micro loans for entrepreneurs who may not qualify for traditional loans.
www.mbda.gov For minority-business beginners.
http://acenet.csusb.edu You might find a rich individual, or "angel," investor here.
www.findingmoney.com, www.privateequity.com, www.nvca.org, www.springboardenterprises.org These are all sites where you can search for venture capital.
This story appears in the August 2, 2004 print edition of U.S. News & World Report.