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Funding Options for a New Home-Based Start-Up


Raising Money for Your Start-Up

By Jim R. Sapp

There are private and professional lending options for small and home businesses that need money for starting up.

Need to raise money for your start-up? The first options that typically come to mind are your personal assets: savings account, credit cards, 401(k) or Keogh retirement plan, life insurance, second mortgage line of credit, or items you own that can be sold for cash. There are, however, lending options for small and home businesses that need money for starting up. Whether you consider a private lender or a professional lender for raising money, carefully plan ahead.

Private Lenders – Family and Friends

Your best possibility for private lenders are family members or friends who own their own small businesses or who work for successful small businesses. They understand the risks and benefits and are generally more willing to take small business loan risks. Remember the following when dealing with family and friends:

Do Not Give Up Ownership for the Loan. No matter how large the loan is from a private lender, never accept the money in return for giving up controlling interest (fifty-one percent or more of your company). You want to retain control of the company.

Set Up a Business Meeting with Your Private Lenders. Discuss the loan in a professional and sensitive manner. Explain your ideas, and give the lender a copy of your business plan, including pro formas and spreadsheets. Then, give the potential lender some time to consider whether to make the loan.

Draw Up a Loan Contract. If someone does decide to invest, draw up a written contract for the loan. You can find a loan document on the Internet, at a bookstore, or perhaps from a local bank. Be sure your private lender has read it carefully. Be sure that you and your lender agree on all the terms  and that you both sign and date the agreement.

Professional Lenders

Professional Lenders want to make loans that will be repaid and that they can profit from. Lenders want those loans to generate a high rate of return for their bank. You must provide a detailed business plan, background materials, website access, or a sample of your product.

You may need to instruct the lender in how your business works, offer a visit to your company site, or demonstrate your service or product. Professional lenders want to know how you will succeed in the lean times, and your business plan must demonstrate the need for your product or service and the profits that can be derived. Your business plan should explain all those details. The following are professional lending options you should consider.

Local Banks 

Try your local bank first, especially if you have a personal relationship with any of the bank officers. Your local bank is close and convenient. But don’t be disappointed if it turns you down, even if you’ve banked there for years. Most small town or branch bankers have a very narrow focus as to the type of loan they want to approve. If not approved, go to another bank.

Banks Outside Your Area

Drive down the highway to the next suburb, town, village, or city, and evaluate the lenders in that area. Lenders within a twenty-mile radius can have vastly different desires for loans. Lenders have been instructed to make good loans within certain parameters, and a new business doesn’t meet many of those criteria. You need a lender that understands your new business. You must sell the lender on both your business and yourself.


The Small Business Administration (SBA) specializes in funding programs for start-up companies. You must apply at an institution with an “Approved Lender” designation from the SBA. Banks favor SBA-guaranteed loans, because these loans transfer the majority of the risk and liability from the bank to the government. SBA loans almost always offer better terms, lower interest rates, and conditions than loans from conventional lending institutions. In addition to its loan programs, the SBA offers start-up financing through the Small Business Investment Company (SBIC) program, management assistance through the Small Business Development Center (SBDC) program, and small business counseling through the Service Corps of Retired Executives (SCORE) program.

Internet Loans

Go to your favorite Internet search engine and type in “commercial loans” and your industry type. You can narrow your search immediately to the banks and other lending institutions that handle the kind of loan you want. Each time a lender requests your credit history, it lowers your credit score on the bureau’s rating scale. A lower score, in turn, decreases your chances of getting the loan approved. So apply to only a few institutions where it seems like you’ve found a good match.

Normally, each lending institution will provide an application on its site. Fill out all questions on the application, provide a clear and concise description of your business, and be specific about the amount of money you need.

Angel Investors

“Angel” investors are business-wise investors who enjoy helping small companies get started. There are angel investors in most every community who will share their knowledge and invest their money with you. Angels tend to be single investors rather than companies. They understand start-up struggles and are willing to be patient until the company is performing. Angels generally like to invest $1 million or less in a small business. They will require stock ownership in the company and a favorable rate of return on their investment. As with all lenders, you will need to document everything before you receive any money. Once your company has matured and is producing profits, slowly buy back the angel’s stock. To get information on the network of angel investors, research your local library and any local business magazines. For a nationwide search, look on the Internet under “Angel Investors.”

Venture Capitalists

Venture capitalists (VCs) are investors who fund early-stage companies with a high-risk, high-return potential. VCs want to invest in companies that have the potential of getting very large (and profitable), very quickly. Venture capital companies generally want to make investments of over $1 million, with an average investment in the $5 million range.
Venture capitalists contribute a vital resource, but their money is not without risk to the business owner. If they believe in the potential of your company, the VC will want the following before investing in it:

Large stock ownership in the company

Double-digit interest (ten to twenty percent, perhaps as much as twenty-five percent) on their investment

Active management in the company

Exit strategy for the VC’s stock shares and capital

If the investment made by the VC is large and critical to the growth of your company, the VC may ask for controlling interest in your company. If that is the case with a VC investment, be sure you have a “buyback” clause in your agreement that forces the VC to sell your company stock back to you in five years for a specific formula. You can also ask for the “right of first refusal” if the VC wants to sell its stock in your company. Be sure to have good legal representation if you enter into any venture capital agreement.

Lending Takes Time

Don’t push a lender; give him time to understand your business. The more complicated your needs and the larger the amount needed, the longer the process will take. For your own planning purposes, incorporate this time into your company timetable. HBM

Jim R. Sapp is Founder and President of eSapp Consulting LLC and recipient of both the Entrepreneur of the Year award and national Blue Chip Enterprise Award. Mr. Sapp has an extensive background as a business owner and consultant. eSapp Consulting LLC has experience at all levels of business development. Whether your business needs expansion analysis or turnaround assistance, eSapp Consulting LLC has the knowledge and ability to make the leap effective. Each of its members has an average of 18-years experience in such diverse industries as business development, technology, manufacturing, healthcare, and finance. For more information, contact Jim R. Sapp, 8070 Castleton Road, Indianapolis, IN  46250, 317-577-4995 ext 106, jsapp@esapp.com, www.esapp.com.

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