The First Step to Success: Securing Funding For Your Small Business

I. Introduction

Anyone who has considered starting a new business can attest to the
excitement that comes along with being one's own boss, setting one's
own hours, and turning a personal dream into reality. However, once the
initial thrill wears off, the daunting task of ensuring enough
preliminary funding and finding continued financing for the business
can quickly turn this dream into a nightmare. This article will discuss
the ways in which a small business can obtain initial funding and
continued financing. First, it will stress the importance of creating a
substantial business plan to which potential investors and sources of
funding can look to learn about the business. Second, it will discuss
debt options for funding and financing a business. Third, it will
discuss equity options for funding and financing a business. Finally,
it will conclude by summarizing the options for funding for a start-up
business and continued financing of a new business.

II. Making a Business Plan

Solid business plans are resources that potential investors and
lenders use to understand the business they are investing in and to
feel secure that their investment has a high potential for success.
[1]  Generally, a business plan outlines the type of business the
entrepreneur wishes to start and gives financial projections for
expenses and income for at least three years. [2] Additionally, if an
entrepreneur can show that he or she is investing some of his or her
own money in the business, investors and lenders will be satisfied that
the entrepreneur has a financial stake in the business. [3] A good
business plan "should show good profit potential in a short period of
time." [4] However, small business owners should be aware that a even
good business plan will not ensure funding if the business is based on
unsteady ground. [5] Rather, a good business plan gives the investor a
basis on which to invest in a company with the potential for success.
[6]

Another way to make a new business appealing to potential investors
and lenders is to show that the business fits a niche that no one else
has filled. [7] For example, a firm became aware that surgical
instruments were only sold in bulk to all medical institutions. [8]
However, small medical institutions generally threw the instruments
away after one use because they did not have the capability to
sterilize the instruments. [9] After performing some research and
speaking with various physicians and employees, the company began
selling cheaper, but just as effective, disposable instruments to small
medical organizations. [10] The key to finding a niche is to "try to
find the right configuration of products, services, quality, and price
that will ensure the least direct competition". [11]

III. Debt

Debt is defined as when a "business borrows the amount of money it
needs, with an arrangement for repayment of the principal plus
interest." [12] Debt can come from a variety of sources including
credit cards, commercial banks, government lenders, including the Small
Business Administration, and family and friends. [13]

Using credit cards may often seem like an easy fix for entrepreneurs
who need more capital to start their business. [14] However, credit
cards can quickly became black holes of indebtedness. "The trouble,
experts say, is that few business owners take the time to read the fine
print, so they don't understand the financing terms and fail to guard
against rising rates."  [15] Additionally, entrepreneurs who use
credits cards should be sure to diversify their line of credit so that
if an unanticipated cost arises, he or she has alternative payment
options rather than being "tapped out" of the one credit card they use.
[16]

Commercial banks are the most common source of funding for small
businesses. [17] However, contrary to popular belief, banks generally
do not loan money to start businesses. [18] Rather, banks serve to
provide funding once a company has a solid business foundation. [19] In
rare instances, however, banks will lend to start-up companies without
an established foundation. [20] "[For] businesses that do not have
substantial assets or healthy revenues, the bank may look at the
creditworthiness of the owners. Many financial advisors counsel that
you guard your personal credit as this may become handy in such cases."
[21]

The Small Business Administration is a government organization that
guarantees loans for small businesses. [22] The Small Business
Administration guarantees loans for businesses that might not be able
to qualify otherwise by allowing banks "to extend credit to companies
that might not qualify conventionally . . . The loans typically have
longer terms so you can stretch the payments and make them more
affordable." [23]

In particular, the Small Business Association 504 program may appeal
to small business owners. [24]  The 504 requires the business owner to
put up some of his or her own money. [25] "To finance [a] purchase
through a 504 the borrower must put down at least 10%, while an
SBA-certified non-profit agency lends another 40% through a
government-backed boding offering. Then, a commercial bank or other
lender provides the remaining 50%." [26] Although the nature of a 504
loan requires many more parties and administrative steps, it may be a
good option for entrepreneurs who are having a hard time getting a
private loan. [27]

Another sources of funding that is commonly used is borrowing money
from family or friends. [28] While this method may be the easiest from
an administrative standpoint, it often causes problems if the business
fails and money is lost. [29] While family and friends may have noble
intentions, if they are not experienced investors, "they don't fully
understand how much risk there is . . . [M]ake sure that you understand
how easily this money can be lost, and that you make them understand as
well." [30] If individuals give money in exchange for a share of the
business, this is considered equity, as well. [31]

IV. Equity

Equity is defined as "trading an ownership interest in the business
for the funding needed by the business." [32] Equity can include
private sources, venture capitalists, angels, and grants. [33]

Venture capitalists do not generally invest in start-up businesses
unless there is "a rare combination of product opportunity, market
opportunity, and proven management." [34] Venture capitalists invest in
businesses with a high potential for capital- this means entrepreneurs
will little or no experience will most likely need to look elsewhere
for funding. [35] Business plans are a good way to show a venture
capitalist that the firm has the necessary elements to succeed. [36]

Angels are another sources of equity for start-up businesses. [37]
Angels are individuals with a substantial amount of money who invest in
start-up businesses. [38] "They are stricter about screening but also
more realistic about what
they're buying . . . [T]hey're not asking for too much ownership of the
companies or too many rights to impact decision making." [39] Angels
are a good option for individuals who want to keep substantial control
of their business but do not want debt. [40]

Grants, or "free money," are another option for entrepreneurs
looking for equity. [41] Grants can be found by searching the Internet,
inquiring to various business groups, and searching state and local
government websites. [42]

V. Conclusion

All of the sources of funding discussed above come with risk for
both the business owner and the source. However, by creating a solid
business plan to present to potential investors and lenders, an
entrepreneur will be on the right path to success. Depending on what
the business owner would like to achieve, debt or equity offer many
options. Additionally, all new business owners should remember to
consult with an attorney for advice on the legal implications of their
actions before committing to borrow or accepting money.

[1] Tim Berry, Funding Tips for Small Business, http://articles.bplans.com/index.php/business-articles/financing-a-business/funding-tips-for-small-business (last visited Sep. 29, 2008).

[2] From the 'Lectric Law Library's Stacks: Business Basics,
http://www.lectlaw.com/filesh/qfl10.htm (last visited Sep. 29, 2008).

[3] Berry, supra note 1.

[4] Id.

[5] Berry, How to Get Your Business Funded, http://articles.bplans.com/index.php/business-articles/starting-a-business/how-to-get-your-business-funded (last visited Sept. 29, 2008).

[6] Id.

[7] Write a Business Plan, Small Business Administration, http://www.sba.gov/smallbusinessplanner/plan/writeabusinessplan/SERV_NICHE.html (last visited Sept. 29, 2008).

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Henry Ongeri, Show me the Money: Funding your Small Business,
<!–
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:"Times New Roman";
mso-fareast-font-family:"Times New Roman";}
h1
{mso-style-next:Normal;
margin-top:12.0pt;
margin-right:0in;
margin-bottom:3.0pt;
margin-left:0in;
mso-pagination:widow-orphan;
page-break-after:avoid;
mso-outline-level:1;
font-size:16.0pt;
font-family:Arial;
mso-font-kerning:16.0pt;}
@page Section1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.Section1
{page:Section1;}
–>
Mshale, Jan. 6, 2008, http://www.mshale.com/article.cfm?articleID=1659.

[13] Id.
<!–
/* Font Definitions */
@font-face
{font-family:Tahoma;
panose-1:2 11 6 4 3 5 4 4 2 4;
mso-font-charset:0;
mso-generic-font-family:swiss;
mso-font-pitch:variable;
mso-font-signature:1627421319 -2147483648 8 0 66047 0;}
@font-face
{font-family:Gautami;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:2097155 0 0 0 1 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:"Times New Roman";
mso-fareast-font-family:"Times New Roman";}
@page Section1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.Section1
{page:Section1;}
–>

[14] Colleen DeBaise, The Six Best Places to Find Funding for Small Businesses,
<!–
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:"Times New Roman";
mso-fareast-font-family:"Times New Roman";}
h1
{mso-style-next:Normal;
margin-top:12.0pt;
margin-right:0in;
margin-bottom:3.0pt;
margin-left:0in;
mso-pagination:widow-orphan;
page-break-after:avoid;
mso-outline-level:1;
font-size:16.0pt;
font-family:Arial;
mso-font-kerning:16.0pt;}
@page Section1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.Section1
{page:Section1;}
–>
SmallBiz, Feb 16, 2007, http://www.smsmallbiz.com/capital/The_Six_Best_Places_to_Find_Funding_for_Small_Businesses.html.

[15] Id.

[16] Id.

[17] Finding Startup Capital for Your Small Business, All Business, http://www.allbusiness.com/business-finance/business-loans/662-1.html (last visited Sep. 29, 2008).

[18] Berry, supra note 5.

[19] Ongeri, supra note 12.

[20] Id.

[21] Id.

[22] Debaise, supra note 14.

[23] Id.

[24] Colleen Debaise, Businesses Find Cheap Capital in SBA Mortgages, Aol Small Business, http://smallbusiness.aol.com/article/_a/businesses-find-cheap-capital-in-sba/20080731134009990001.
<!–
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:"Times New Roman";
mso-fareast-font-family:"Times New Roman";}
@page Section1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.Section1
{page:Section1;

[25] Id.

[26] Id.

[27] Id.

[28] Berry, supra note 5.

[29] Id.

[30] Id.

[31] Ongeri, supra note 12.

[32] Id.

[33] Id.

[34] Berry, supra note 5.

[35] Mark Henricks, The State of Small-Business Funding, July 2006, http://www.entrepreneur.com/money/financing/article159798.html.

[36] Id.

[37] Id.

[38] Berry, supra note 5.

[39] Henricks, supra note 35.

[40] Id. See also Sharpening your skills: Starting a Business, Feb. 25, 2008, Harvard Business School: Working Knowledge, http://hbswk.hbs.edu/item/5841.html.

[41] Debaise, supra note 14.

[42] Id.

Comments are closed.