Financing Your Home Business

Financing Your Home Business

© 2002 Elena Fawkner

So, you have a great idea for a business and, more
importantly, the know-how to bring it into creation. The
only thing you’re missing is the cold hard cash to get
started. What are your options?

Assuming you don’t have a ready line of credit, an
expansive bank manager, wealthy relatives or a substantial
stash of retirement savings you’re willing to risk, you’re going
to have to do some serious homework and legwork.
Fortunately, there are a number of sources of finance for the
fledgling small business entrepreneur, at least one of which
may be right for you.

SBA LOANS

Available only to U.S.-based businesses (but look for similar
programs in your own country if you’re outside the U.S.), the
SBA (the U.S. Small Business Administration) has assisted
thousands of entrepreneurs start their own small businesses.
The SBA doesn’t issue grants (money you don’t have to pay
back) or make loans directly, rather, it guarantees loans made
by private lenders thereby reducing or eliminating the risk
inherent in new business ventures and making lenders more
willing to lend.

The primary consideration for the SBA is repayment ability
from the cashflow of the business as well as “good character,
management capability, collateral and owner’s equity”. You
will be expected to personally guarantee your loan. This means
your personal assets are at risk.

As for the types of businesses eligible for SBA loans, the SBA
imposes the following criteria: the business must be “for-profit”
(all that means is that your business has a profit motive, not
that it has actually generated a profit yet), be engaged in
business in the United States, there must be “reasonable”
owner equity (what’s reasonable will depend on the
circumstances) and you are expected to use alternative financial
resources first, including your own assets where practicable.

The SBA also imposes limitations on the use of loan proceeds.
For example, although the proceeds can be used for most
business purposes (the examples given by the SBA include “the
purchase of real estate to house the business operations;
construction, renovation or leasehold improvements; acquisition
of furniture, fixtures, machinery and equipment; purchase of
inventory; and working capital”), you can’t use the loan
proceeds for financing floor plan needs, to pay existing debt,
to make payments to the business owners or to pay delinquent
taxes etc.

As a general rule, loans for working capital must be repaid
within seven years and loans for fixed assets must be paid for
by the end of the economic life of the assets (but not to
exceed 25 years).

Interest rates are negotiated between the borrower and the
lender but the SBA imposes maxima which are pegged to the

Prime Rate.

Finally, the SBA charges lenders a guaranty and servicing fee
for each loan approved, and there is nothing preventing the
lender oncharging these fees to the borrower. The guaranty
fee for a loan of $150,000 or less is 2% of the guaranteed
amount; over $150,000 but below $700,000, it’s 3% and above
$700,000 it’s 3.5%. The annual servicing fee is 0.5% which is
calculated on the then-current loan balance.

Where the borrower meets the SBA’s credit and eligibility
requirements, it will guarantee up to $85% of loans $150,000
and less and up to 75% of loans above that amount (up to a
maximum of $1,000,000).

For more information about the various SBA loan programs,
visit the SBA website at http://www.sba.gov.

PRIVATE GRANTS

At present, there are no U.S. government grants offered for
small business. If you're outside the U.S. check with your own
government about the availability of small business grants. You
never know!

Various corporate grantmakers make grants available for small
business though. For more information, visit
http://www.fdncenter.org/funders/grantmaker/index.html .

ANGEL INVESTORS

Angel investors are good souls with a healthy sense of self-
interest. Figuring they can get a higher return if they’re prepared
to take a bit of a risk, they’re also often successful
entrepreneurs themselves and want to give their fellow travellers
a hand up.

Think of funding from an angel investor as a bridge or gap-filler
between being a start-up and qualifying for venture capital. The
kinds of dollars we’re talking about here are between about
$150,000 and $1.5 million. Beyond that point you’re in low
venture-capital territory.

The SBA estimates that there are around 250,000 angels in the
U.S., funding about 30,000 companies a year. So, how do you
hook up with one? Not an easy task, unfortunately. It comes
down to networking. Start by talking to professional and
business associates - they will often know someone who knows
someone etc.. Also, check out ACE-net if you’re prepared to sell
a security interest in your company. It’s an internet-based listing
service for securities offerings of small, growing companies. The
website is at https://ace-net.sr.unh.edu/pub/.

VENTURE CAPITAL

You’re in the big leagues now. Generally you’re in the ballpark
of millions (of dollars that is) rather than thousands. Venture
capital firms look for their return on investment from capital
appreciation rather than interest (unlike banks, for example).
They’re generally looking for a return of 500-1,000% on exit.

It won’t surprise you to learn that venture capitalists are
particularly leery of internet-based businesses right about now
and not without good cause. It also serves them right. But if
you have a solid business plan and strong growth potential, this
could be an option for you longer term.

One of the common concerns about this form of financing,
however, is that you may have to part with an unacceptable
amount of control over your own business. In return for their risk,
venture capital firms will usually want some control over how the
business is run and a say in business decisions. A venture
capitalist will expect a seat on the board, for example.

It’s important to remember, though, that it’s in the venture
capitalist’s best interests for your business to succeed, so
giving up some control in exchange for outside expertise may
well be something worth thinking about.

To find venture capitalists, get a hold of “Pratt’s Guide to
Venture Capital Sources” for a listing of 1,500 or so including
names, contact details and areas of interest. Of course, you'll
find no shortage of information online as well.

For most readers of this article, your best bet would be to start
out by investigating the various loan programs offered via the
SBA (or your country’s local equivalent). But don’t overlook more
obvious, close to home sources first. For example, if you have
family funds at your disposal and you’re confident that your
business will succeed, better to start out slow and ease into
outside sources of financing as your business cashflow can support
it. After all, Uncle Jack is much more likely to be understanding
about the occasional cashflow crunch than your bank manager.
Of course, if you're NOT confident that your business will
succeed, don't get into debt with *anyone*, let alone family
members.

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Elena Fawkner is editor of A Home-Based Business Online ...
practical business ideas, opportunities and solutions for the
work-from-home entrepreneur.
http://www.ahbbo.com