Funding My Business

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

Use Your Own Assets
Money may not buy happiness, but it sure will help you get your new business off the ground.
Unfortunately, finding outside money for a new business isn't easy. Banks are notoriously reluctant to lend money for startups. Typically, you'll need to show at least two years of profitability to win a conventional bank business loan. To get their businesses going, most small business owners start out by relying on their own assets. Here are some options to consider:

Use your savings.
Take a loan against the equity you've built up in your home. You have two options. You can either get a home equity loan or a home equity line of credit. But one grave drawback: if you default on payments, you could lose your home.
Sell some investments.

Sell some assets.

Borrow against your 401(k).

Apply for a grant.

Get credit card advances.

Note: Use this option carefully. The money is easy to get, but it comes with a hefty price tag of high interest rates.



Borrow From Friends and Family
If you can't fund the business on your own, friends and family are a great option. Unlike a bank, they know your character well and will probably be more willing to take a risk on your business idea. However, because of the risk that mixing business and friendship may sour the relationship, you'll want to proceed carefully. Here are some guidelines to follow:

Have your attorney draw up a formal agreement with collateral specified and all the terms spelled out, including the interest rate, payment schedule, and what recourse the lender has if the loan is not paid.

When you pitch your business idea to your friend or family member, approach the meeting professionally. Present your idea and your business plan just as if you were applying for a loan at a bank.

Avoid mixing emotions with business. If a family member offers to loan you money in exchange for having a closer relationship, accepting the offer could create a very bad situation.


Borrow Money from a Bank
Banks have the money, but the chances of a new business qualifying for a loan are very small. Unlike your family, a bank won't lend you money simply because they like your idea and trust your character. Still, some new businesses do qualify for loans. Whether or not you can qualify depends heavily on your business' cash flow, your personal credit history, your equity in the company, and the collateral used to secure the loan.
The Small Business Administration (SBA) offers several programs to help businesses get loans. The SBA's greatest aid comes in the form of a loan guarantee to the bank. If you are unable to repay the loan, the SBA will repay the bank a pre-determined percentage of your loan. Contact the SBA for more information.

Check with Minority or Women's Organization
If you're a woman or a minority, there are many organizations that have been set up to help both groups get their businesses off the ground. Some organizations may offer special financing deals.

Apply for a Grant
Many foundations and government agencies offer grants or incentives to small businesses that meet specific requirements. Some grants are offered as part of an entrepreneurial award. Check your local government for more information.

Other Sources of Equity Funding
There are a few other sources of equity funding worth mentioning. But remember, when you open your company to outside investment, you also open it to some degree of outside control. The more money you get from the outside, the less control you'll retain.

Venture capital
Getting capital from a venture capitalist is extremely difficult, but it is possible. Venture capital firms generally look for entrepreneurs with unique ideas that can't easily be replicated. They're interested in businesses that are relatively cheap to start and that can quickly grow to be multi-million dollar corporations that offer public stock.

Angel investors
Angel investors are private individuals who invest money in businesses. Like venture capitalists, they're hoping to get a large return on their investment. Unlike venture capitalists, they may be willing to offer you money without imposing so many conditions.