Startup Business Financing

Startup business financing can come from a number of different sources.
Startup business financing can come from a number of different sources.

Startup Business Financing

There are startup business financing options other than conventional financing or pursuing SBA loans. For many businesses these are more likely to get a business going.

Community Development Organizations

All urban areas will have a community development organization with a focus on startup business financing. Most states will have a rural equivalent, often regional if not statewide. Many of those are funded through various government grants, but my experience is that the best community development organizations are those that are privately funded. Like business versus government for efficiency, non-profits that are privately funded work harder. They work harder to make an impact, to get small businesses funded, and of course to finance themselves. Government funded organization usually do more to justify the grant and get it renewed.

Regardless, a business may be limited to what is at hand. These organizations will offer microloans. Microloans are classified as loans under $35,000 or less. These loans are most often provided by the organizations themselves. Others may guarantee the loan and use a bank to be the loan provider. I have even heard of some that will forgive the last portion (up to a third) of the loan if payments have been timely and credit established. Interest hovers between 7%-10% and loan terms may be months to years, depending on the size of loan. Collateralization varies, again because of the diversity and structure of the different organizations. I have seen signature loans to a pawn shop style collateralization; a storage room full of bicycles, TV's, stereos, golf clubs, etc. to secure small loans. These loans will offer a number of times one can renew the loan. After a set number of loan renewals (with on-time payments), credit can be extended without collateral.

These types of loans are good for home-based businesses. So, called cell phone businesses- a business based upon a phone number and some advertising. Even though the loans are small, much of the same requirements as conventional loans are required such as a business plan and collateralization. What is often waived are credit requirements and equity investment. Unless, a business start-up had high capital requirements for real estate and/or inventory this should be the preferred method of startup business financing.

Venture Capital

The mystical venture capitalist while no myth, is rare. Venture capitalists are looking to essentially flip a business. Invest, pump up quick value, and then sell at a premium. For real sophisticates, that sale may be in the form of a big-time public stock offering (IPO). Venture capitalists are not nice visionaries looking to help a good bloke with an idea. They are sharks looking to use big dollars to make obscene dollars. A founding business owner will be marginalized in their business, so expect it. The founder may even be replaced. This form of financing is best if one has the next Facebook, needs dollars to take it to the next level, and are willing to sell-out. Most likely, a huge profit will be made (VC's only bet on sure things, unless there is a tech bubble happening), but do not dream of staying and being the next Larry Ellison. However, because of the mere genetic material of venture capitalists, they will have major connections to make the huge sale happen. Pursue this form of startup business financing only if the business has the next big idea and the owner plans on selling-out for big dollars as soon as possible. Think Mark Cuban.

Partner

Bringing on a partner(s) has many benefits. First, the risk of the business can be spread, and not have everything carried by just one person. Second, everyone having a role a person can bring in needed expertise or money. That is if the business owner is an expert in a field, they could bring in a partner for the financing. Splitting profits, usually more heavily to the financier initially to repay his investment, but more equitable later. An initial equitable investment in the business has the benefit of utilizing everyone's expertise in their field, while agreeing upon major changes or directions. This helps tempers impromptu decisions, which could hurt business.

Stocks

A business does not have to be listed on the New York Stock Exchange to issue stock. As a matter fact it doesn't have to be listed on any exchange. Stock issuance is just saying that each share of a stock has a certain fraction of ownership. Stocks are fractional ownership of a business, or having a multitude of partners. The structure of the business can be done almost anyway the business desires to be a public company, but the business does have to be above board with all plans and dealings. Especially as the stock is sold. The business is incorporated in the local state and has to follow the laws of that state. If the state is not business friendly, the business may be incorporated in a business friendly state like Nevada and sell stocks as a business from Nevada. Disclosure that the business is Nevada (or which ever state) based is necessary, but most people won't care.

Selling stocks has some strong advantages. First, it is essentially getting people to loan your business money, except there is no repayment until there is profit (dividend). Another advantage is that it is could be easier to get fifty people to give you a loan (buy) $1,000 than finding one person who will give $50,000. And it is easier still for someone to buy 1,000 shares of stock at $1.00 than one share at $1,000. By setting it at $1.00 a share, people can get their minds around it. Set it at $1,000 barriers come about. People feel good about the cheap price, they are just in it for a steal ($1 a share), and are sure to get as much as they can.

The downside is one is giving up full ownership forever. The only recourse is to buy back the stock later, probably at a premium. Also, it is probably best if an attorney got involved to help set the structure up in the beginning. In my humble opinion that is a major downside- cost and, well, dealing with lawyers.

Creative

This is where an entrepreneur gets to use their creative juices to find methods to fund a business. I have heard everything from gambling (research the history of FedEx) to maxing-out credit cards. Most of those methods are not an option. A familiar story is asking family for funding, and that is an interesting point. Mixing family and money aside, the real question is if one's family has it to offer. Does mom, dad, or the grandparents have $50,000 plus to give over to a business enterprise, to invest? It is also asking people who know a person best if they would put some serious trust into that person's hands.

One creative method that I throw out there is social lending also called crowdfunding. This is a relatively new method of looking for funding. People looking to make a return on their dollar will lend money for ventures through an online broker. Often one develops a pool of lenders and makes set payment to them through an intermediary web site. The advantage is one could take a number of off-line loans and add them to the social lending sites, so everyone gets paid in a single payment at one time. It would help administratively, while also leveraging numerous smaller loans he or she may have been able to secure through friends and family. No single friends or family member may have (or be willing to risk) $50,000, but he may be able to secure $1,000 from fifty friends or family (refer back to stock sales). Be sure to attend the next family reunion!

The business owner is not limited to their our own network either. A person may also appeal to the online people for funding of their business ideas. This returns one back to credit, business plan, etc., but it does open a number of possibilities. Since collateralization is difficult online, credit scores take a special importance. However, the fact that people are looking to loan money online for a return means they are willing to hear one's proposal- willing ears are ready to loan. Some social lending sites to look-up are Lending Club, Prosper, and Loanio. Loanio has announced it will help troubled credit with a higher rate and a co-signer.

Startup Financing Comments 1 comment

Blair Stover 6 years ago

Great advice, but I would advise you not to choose just any partner. He or she needs to be someone you trust, see yourself doing business with for the long run, and therefore shares the same goals and morals as you. Partners can be beneficial for the mentioned reasons, but can also pose as a huge threat if things go sour.

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