How to secure funding

Now that you’ve written a business plan it’s time to move onto the next step: securing funding for your new venture.  There are many ways to do that and I will talk about most if not all of them today.  However, it is trickier to secure funding for a small business.

“Today, entrepreneurs are much more likely to dive into their own pockets and hunker down for a battle to start up and stay alive. But if you don't have the cash in your wallet, what do you do? Luckily, there are still options for funding new companies, but finding and securing the cash will take careful research, good negotiating skills, and, above all, an unflagging commitment to launching your new business.”

Sometimes getting money to start up your new venture can seem like a daunting task.  You have to calculate your startup costs and then add in the amount of money you need to cover your personal expenses.

Regardless, thousands of individuals do find the money to start up a new business – but how to do it?  Some are less risky but others involve a lot of financial risk.

Sometimes it’s wise to maintain a part-time job where you will still likely have the luxury of benefits to cover your family’s health insurance and a 401K.  You might not want to quit your day job until your business has a steady amount of customers and profits.

It might be wise to start your business based out of a home office for much less money so that you don’t have to pay for office space.  Live frugally.  While you might not want to make it clear to your clients that you are working from home, consider using a virtual office from an office business center where you can get a phone number, have a virtual assistant and mailing address that does not reveal your home address.  “According to the US Small Business Administration, 52% of new businesses are home-based.”  A virtual office is a great option for young companies.  Having such a resource might make you seem more established – investors and clients might take you more seriously.  They are offered at a low cost.  One of the best perks is that you don’t have to change your address should you seek to move into the same office business center down the line with which you are renting your virtual office.  One company out there offering virtual offices which you might want to check out is Emerge212: http://www.emerge212.com/boutique-virtual-space.html.  Emerge212 also offers a “stepping stone” program offered at the low cost of $850 a month all-in.  Here’s what the program entails: You simply share an office with one to three like-minded business professionals.  You receive a dedicated desk, a 212 number (a highly sought after option), 24/7 access, access to all the common spaces and conference rooms and high-speed internet connection.  This is up to a 60% savings when compared to renting a similar Class A-quality office with the same level of services.

If you have good credit, consider using a credit card which is one of the easiest ways to get the money you need to start up a new business.  “Equipment, suppliers, advertising and postage (for mailings) can all be purchased with a credit card.  And if your credit card gives you a line of credit, you can give yourself an instant loan (up to your credit limit).  But using a credit card to start your business bears some significant risk, too.  If you're not careful you can quickly run up a huge credit card bill – a bill you'll be responsible for paying whether your business is successful or not.”

You might want to consider a home equity line of credit.  Some banks offer home equity lines of credit that let you borrow up to as much as 75% of the appraised value of your home.  The downside – you’re putting your home at risk.  If the business fails and you can’t repay the loan, you could lose your home.

You could also try applying for a small business loan.  You’ll need to have a sound business plan already in place to show to investors.  One form of small business financing is debt financing. Small businesses can apply to banks or other financial institutions, like credit unions for commercial loans.  Unfortunately, “banks often do not make loans to start-ups whereas they are more apt to do so for ongoing businesses.”  If you are applying for a business loan for a start-up business, the only way you will be approved by the bank is if you pledge your personal wealth as collateral.

A good resource for small businesses is the US Small Business Association (“SBA”).  You can find them at: http://www.sba.gov/.  Even though the SBA does not loan money directly to small business owners, they offer many loan programs that play an important role in securing a loan as they provide the guarantee to local banks and credit unions that you will repay your loan as promised.  SBA can help facilitate a loan for you with a third party lender, guarantee a bond, or help you find venture capital.

 “Venture capital shouldn’t be thought of as a source of funding for any but a very few exceptional start-up businesses. Venture capital can’t afford to invest in start-ups unless there is a rare combination of product opportunity, market opportunity, and proven management. A venture capital investment has to have a reasonable chance of producing a tenfold increase in business value within three years. It needs to focus on newer products and markets that can reasonably project increasing sales by huge multiples over a short period of time. It needs to work with proven managers who have dealt with successful start-ups in the past.”

You might also seek out an Angel Investor.  “Small businesses looking for financial help from an “angel” often turn to individuals willing to invest in promising, start-up opportunities. Angel investors can be a good funding source to consider after you’ve tapped your friends and relatives. But angels usually don’t write blank checks. They’ll want to see progress and a way to exit the deal down the line with meaningful profits. So expect angel investors to do a lot of research and careful investigation into your business plan.”  Angel investors often invest through groups or networks.  Angel investors are usually thorough, so don’t expect to get your money quickly.  It could take several months to meet with different individuals or groups and answer all of their questions.  Angel investors will own part of your company so they’ll likely want a large say in major decisions.  However, many angel investors are former business owners who want to help people like themselves.  One prominent organization is “New York Angels” (http://newyorkangels.com/).  They are comprised of over 75 members – entrepreneurs, CEO’s and venture capitalists.  They are a leading organization committed to finding, funding and mentoring new companies in a wide array of industries.  They offer mentoring and coaching to the ventures they invest in.  They lead deals ranging from $100,000–$1 million.  To find other Angel Investors, you can check out: http://www.fundingpost.com/angelgroup/newyork-angel-investors.asp and http://www.go4funding.com/Articles/Angel-Investors/Angel-Investor-Network.aspx which offer lists and networks of NYC Angel investors.

Most importantly, be prepared to discuss your loan request details: why you want the loan, how much you’ll need, how will the money be used, the amount of time it will take to repay the loan and what other business debts you have.  And of course, make sure that you find investors whose interests align with yours.

So what have we learned here today?  There are many challenges in finding funding to start up a small business but there are simple steps you can take to do so without what everyone thinks is the typical go-to-source, venture capitalists or business loans.  As I’ve written today, starting up a new business is very risky financially and you have to be willing to take personal risks and put up your own capital to get going.

Until next time…