How to get loans, attract investment capital, and more.
Some of the world’s most famous companies – including Apple, Hewlett Packard, and Google – had humble beginnings in the founders’ garages. While they started on a shoestring, that doesn’t mean the founders launched them without putting in any money at all. To launch even a tiny business, you’ll usually need some cash to get rolling, whether it is to buy a computer, print business cards, or advertise. If you’re going to open, say, a retail store or restaurant, you’ll need much more.
Saving up some of this money before you get started is always a smart idea. But if you don’t have the luxury of waiting until that point, you may need some outside financing. Here are some of the most common types.
Borrowing money from loved ones can work out well if you’ve got a good chance of paying them back. Unlike your local bank, they probably won’t require a credit check – a plus if you are still establishing your credit in this country. But there are some downsides. “If you can’t make a payment, you can destroy a relationship,” says Marilyn Landis, a former commercial lender who is now principal of Pittsburgh-based Basic Business Concepts, which provides financial management services to businesses around the country. Setting up a formal payment schedule by using a service such as Virgin Money can be a good way to keep these lenders at ease, she says.
These are small loans – usually from about $500 to $50,000 – geared for entrepreneurs who don’t yet have the financial track record to go after a traditional bank loan. Often you can apply for them through nonprofit economic development organizations, such as Accion, the nation’s largest micro-lender. Interest rates depend on your credit history. At Accion, for instance, they range from 8% to 15%. Some of these lenders have a credit-builder program, in which those with no credit history can take out a loan for several hundred dollars and establish one by paying it back on time. Some also provide educational programs that help borrowers do everything from manage their books successfully to spread the word about their businesses.
Banks usually shy away from lending money to brand-new businesses, preferring to wait until a borrower has a track record of profitable operations for a few years. That’s especially true in today’s tough economy. But if you have run a thriving business for a few years and have a strong credit history, going after a Small Business Administration loan at your bank is worth a try. Interest rates vary, but they tend to be competitive. In August 2010, for a fixed rate loan of $50,000 or more that would be paid back in more than seven years, the maximum interest rate could not exceed 6% (the prime rate plus 2.25%). And if you are running a business with a high overhead, such as manufacturing, these loans may meet your needs better than, say, a microloan. Currently, the maximum loan size for SBA 7(a) loans – one of the most popular kinds – is $2 million.
Angels are private investors who will give you startup money in exchange for a certain percentage of ownership in your business. They’re called angels because, in the best-case scenario, the cash and advice they provide can seem like a gift from the heavens. Typically, they like to invest in fast-growth businesses, where they will get a high return on their investments, so if you’re starting, say, a mom-and-pop dry cleaner, this type of funding isn’t for you. You can find angels through groups called angel networks (Vfinance.com offers a national listing). If you decide to raise money this way, you will need help from a lawyer to put the terms of your deal in writing.
This is one of the most popular types of small business financing in the U.S. right now, because of the difficulty in getting traditional bank loans. But using credit cards to make purchases and get cash advances for your business can be very costly, if, say, you miss a payment and a bank increases your interest rate.
With conventional sources of financing less available than in the past, you may need to look to other sources of cash. One of the most innovative sources of funding for new enterprises is crowdfunding, a way of letting ordinary people vote with their contributions on the prospects of a new business, product, or charitable effort. While crowdfunding has been very popular with entrepreneurs, it has also been used successfully by artists, film makers and musicians.