Show me the money!
Not to take anything from the popular movie, “Jerry McGuire,” many
new business owners do have a bit of trouble finding the resources to start a
business. The key here is to not only identify the resources, but determine the
correct amount of financing to launch the venture.
You can get money from the three “F’s”, using the old adage, …Friends,
family and fools. This generally isn’t a recommended course of action if
you want to keep your relationships intact. Besides, you will be relying on your
family and friends for more than cash. You will need emotional support, advice,
and maybe some help in actually running the business from time to time.
So where is the money? The money is in two places,
from your own resources and from external resources such
as banks, finance companies and venture
capital companies. This discussion will not cover any advantages or disadvantages
of
any…only to identify that these resources exist and the choice as to use
them or not, is up to each entrepreneur.
The “internal” resources start with an examination of your personal
net worth. Obtain a Personal Financial Statement and fill one out. (a free statement
is available from the SBA website at www.sba.gov). Do you have enough personal
net worth to do the venture?
A good rule of thumb is four to five times the loan
amount in personal net worth.
Look at the sources of the internal funds. Do you have
any equities, savings or other easily liquid collateral
to contribute? Don’t forget that some
of these amounts will counted as your equity contribution and collateral for
the loan. These can be only counted once.
The “external” resources include the commercial lending system, which
includes SBA lending, direct lending from finance companies which includes those
that can “factor” or advance accounts receivables against the operating
cash you need, and sharing or selling at part of your company to raise capital
via a venture capital firm.
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One note, and we hear it a lot…“Are there any
grants for my start-up business?” Grants do exist for
certain industries, however, a visit to the internet may produce
some results. You may want to start with www.fedgrants.gov.
Most businesses use the commercial banking system for their
resources. First, try your own bank. They know you and you
know them. Some banks also have SBA
lenders on staff, so that a SBA loan can be considered. You still can get a
loan and your existing banking relationships stay intact. Part
of the requirements
of the SBA is the “credit elsewhere” test. You need to propose your
business plan to your bank. If for some reason the loan can not be considered
conventionally, you banks’ staff of SBA lenders (and to some degree the
ABL Fund at AAEDC) is an alternative.
The next resource are programs available through the State
of Maryland, specifically the Department of Business and Economic
Development. The State just released
a new comprehensive brochure “Maryland Small Business Resource Guide.” You
may contact them at www.choosemaryland.org. Programs include program/industry
specific financing. One that I am familiar is Maryland Technology Development
Program (TEDCO). As with many emerging technologies, TEDCO and another partner
Maryland Industrial Partnership (MIPS) is also a good source.
Speaking of the University of Maryland system, don’t forget to contact
the Dingman Center. In addition to capital markets, they have the resources for
high-end business plan development possibly leading to venture capital.
Other resources include the business financing companies
like GE Capital, CIT and others. In this category, I include
companies that can factor or
provide
an advance on your accounts receivables.
Next, are venture capital firms or angel investors. They
could be an alternative. A portion of the company is sold
in exchange for start-up,
R&D, or other
funding needs.
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This list is not
all inclusive as some local governments have incentives and
small funding pools for hiring employees or locating your business
in an area that is focused on revitalization. These are called
HUB Zones, Empowerment Zones, Enterprise Zones. They use U.S.
Census tract and other demographic information to qualify the
applicant. All these resources are available on the Internet.
Go to www.census.gov and search under HUB Zones, etc. You can
put your potential business location into the text box and
see if the street address qualifies.
As you can see you will generally have to your own finance
broker… searching
for avenues of financing. One other note; if you do combine resources, many of
the programs will want a First Priority Lien recorded, some to the exclusion
of others. Will one agency take a second position to another? Just be sure to
collect all your facts and their requirements before you sign.
Finally, when you ask for an amount, you may be quite familiar
with the amount you need, however, (and all is based on risk),
you may not get all of the financing.
This is your stopping point. Review the business plan. Make sure you don’t
accept less and be under capitalized. One of the quickest ways to fail, and go
out of business is to be undercapitalized.
If you have tapped all your external resources and you come
up short…yes
you must make up the difference or just put the plan on hold until you are fully
ready to proceed.
Good luck in your venture…the rewards are priceless.
© 2005, James Triebwasser
James Triebwasser, Director of Loan Administration at the
Anne Arundel Economic Development Corporation.
jtriebwasser@aaedc.org
410-222-7410
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