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Small Business Money, Where Can You Get It?

Posted on 11 May 2010

There are different types of money for your small business project.

Different small businesses have different needs to launch their projects. In may cases, your new business will only need some one else’s money for a short period of time.  You may need money for inventory purchases, product development or marketing and advertising. Someone else needs, something that can leased like; inventory, facilities and equipment.  Of course you need enough cash to run the business until revenue can support your business growth. When you know what you need the money for and how much you need, it will direct you to the source.

Selling Shares (Equity) vs. Borrowing Money

If you do not have enough money in your own bank account, you can sell equity (shares in your business) or you can get a loan.

If you sell shares in your company you don’t have any money to pay back. A buyer of your company shares takes an ownership position in your business and will receive some of your business’ profits. Even though selling shares does not burden your business with loan repayments and interest charges, it will reduce the your share of the profits. When you sell equity (shares) you have to share the profit with your new shareholder.

When you borrow you must be repay the loan with interest, but the lender has no ownership control. Borrowing money at the very start of a new business will drain off income to make the debt payments and can slow down your growth.

There are many types of loans and many way’s to sell equity.  When you sell equity, you will need a lawyer to help you set up the transaction properly.  Find an experienced one, your business depends on it.  If you are pursuing a loan, I suggest a loan broker to help you through the process.  Loan brokers are professionals in structure, rates and sources of money, they can make your life so much easier.

Sources of Money and What they Want from YOU

With your new business plan, financial projections and knowledge, you are now ready to get some money for your new project. Different sources require different amounts of information and preparation. There are exceptions in each case but don’t show up underprepared, always give more than you expect to be asked.

1. Life insurance policies

A common feature of many life insurance policies, is the owner’s ability to borrow against the “cash value” of the policy. There are no restriction on how you use the money because if you don’t pay it back the insurance company just deducts it from any benefits they pay out.  Every policy has different rules on how much you can borrow and how long it takes to accumulate “cash value”.  Some will let you borrow up to 95 percent of the cash value of the policy. As long as you continue to pay the insurance premiums, interest payments are not usually charged.  This is an easy source to tap, I suggest you start here.

2. Supplier credit

Payment terms offered by your suppliers is credit. Take a close look at the discounts for early payment and the penalty for late payment to calculate the true cost of the credit. Some suppliers will offer credit only to well-established firms, you can find a few that will offer limited credit to new businesses. Shop around find what is best for you. To establish yourself as a good credit risk you should present yourself well; see the last posts discussing the 5 C’s of credit. Don’t rely too much on trade credit from just one supplier. If repayment problems arise, you may have your supplies cut off when you need it the most.

3. Friends and relatives

Some people suggest you don’t turn your friends and relatives into lenders because it can strain your relationship. Most entrepreneurs start here first because it is easy and friends and relatives already trust you. If you borrow from a friend or relative, put in writing, with proper loan documents. Have a lawyer review it. You can also get a sample of a loan agreement from your bank, use it as the template to draft your agreement.  I still suggest a lawyer review it just in case.

4. Customers

Ask for a deposit, ask for enough to cover your cost of materials and some labour. It is common to request a deposit from customers when ordering items and they understand completely if you explain why to them.

5. Leasing companies

Leasing business equipment is a great way to reduce your overall cash needs and it can create predictable payment cycles that add stability to your business. You can lease everything from computers to heavy duty manufacturing equipment. Leasing can cost more than bank financing due to the many fees included in the transaction but is sometimes easier to get. Look closely at the term of the lease, if you don’t understand them, call a lawyer.

6. Commercial banks

Banks are the most common lenders and make the most loans. Unfortunately, banks are very

conservative. They accept collateral for business loans, loan approval rests on your ability to repay the loan as shown by your profit projections, management skills and your personal record. This is where all that planning you did comes into play.  Approach your banker before you make your presentation, find out what is important to them, what they are looking for in your plan.  Banks change as the economy changes and their need to lend increases or decreases.

7. Commercial finance companies

Can’t get a loan from the bank? Try a Commercial finance companies, they are concerned with your ability to repay the loan but they are willing to rely on the quality of the collateral rather than your great plan and presentation. No personal assets or collateral? Then a commercial finance company is probably not be the best place to find money for your business. Commercial finance company’s usually charge considerably more interest for borrowing money.

7. Angel Investors

OK these guys are savvy, experienced and looking to control your company.  They have lots of cash and the knowledge to make it work for them.  When considering angel investors, make sure you have a good legal advisor and a great plan.  If you fail to execute your plan, you can find yourself without a job, still a shareholder but not in control.  Angels insist on 51% or more, so if you are going this route, be sure you can succeed or you will loose your business.

Conclusion

Finding cash for your business can be the most daunting task you will ever face depending on the source of your money. In the previous two posts I talked about careful planning, in this last post about finding money for your small business, I will repeat myself. PLAN CAREFULLY, like my old mentor said, “if you are not planning, you are planning to fail.”

Rely on your team of professionals to assist you. Many of them will be rewarded from succeeding at finding you money and won’t have any up front fees.  Yes you get less but that means you have to increase your budget.  Don’t forget, there is always the “bootstrap” method…….or growing from cash flow.  Don’t rush to your success, take your time, learn your business and build your team.

On your team,

Mark