By Nora Caley
You’ll have to present your business plan and answer questions about your projected revenues, the potential risks, and other details.
If you need start-up funds for your home business, you can shop for a loan, investment, and other sources of capital on the Internet. You can find many sources of funding online, and not have to go anywhere to fill out paper forms. You probably will not find one source that will supply all the funding you need, so put together a package of resources.
First, figure out how much you need. Write a list of expenses, ranging from the smallest office supply to your salary. Be specific and remember that things often cost more than you might hope. Also, write a business plan.
It’s difficult for start-ups to get a business loan, because banks won’t loan you money based solely on your good idea. The lender needs collateral, and it also wants to see records of your business’s past revenues. If you are buying a franchise, banks are more likely to loan you money than if you are an independent company because the franchisor has a history of revenues.
Visit several banks’ web sites and click on the Small Business tab to get information on loans and other services. To apply, you will need your business tax returns, bank statements, and other documents.
If you cannot get a business loan, consider using a home equity loan or line of credit. This is a risky source of financing because you use your home as collateral. Another option is to apply for a secured loan that uses your current checking or savings account as the collateral. There are also unsecured loans that have higher interest rates.
If you do an online search for unsecured loans, many of the offers are from consulting firms or brokers, not banks. Read all the fine print because there are loan fees, high interest rates, and credit checks.
You can use your credit card for cash advances, but those can get costly with the fees and interest. Apply for some business credit cards, and use them to buy equipment, pay your taxes, and also get discounts and rewards points.
Visa and American Express offer business lines of credit. You can withdraw money from the line when you need to pay a bill or buy something. There are certain limitations. For example, with American Express, your business has to be at least two years old. You don’t need to be a cardholder, but it is recommended.
SBA has various loan programs, such as the 7(a) Loan Program that provides loans through banks. There’s also the Microloan program, for loans up to $50,000. For those loans, the borrower goes through intermediaries, nonprofits that are not banks. Micro lenders also get funding from corporations and foundations, and are more likely to loan money to start-ups than banks are.
Government and Grants
The SBA does not offer grants to small businesses. Instead, the grants are for organizations that help small businesses. The Minority Business Development Agency of the U.S. Department of Commerce has information on grants for biotech or high tech companies. There are also grants for rural businesses, through the U.S. Department of Agriculture.
If your business is a nonprofit, you can apply for a grant from foundations, corporate giving programs, and state and federal government. You must have 501 (c) 3 status with the IRS, and be prepared for a lengthy grant-writing process.
There are different types of investors. Venture capital firms invest millions of dollars, often to technology-related firms. Angel investors are wealthy individuals who want to invest in something new. Both have specific ways they like to be approached. You’ll have to present your business plan and answer questions about your projected revenues, the potential risks, and other details.
If you get money from an investor, you don’t have to pay it back until you sell the business. The investor becomes a part owner of your business and will want to have some decision making ability.
Ask your family and friends for an investment or loan. Show them your business plan. Tell them how you plan to market your product or service and give them a reasonable estimate of how much revenue your business will generate. If they don’t give you cash, maybe they can work for you for deferred payment.
Put the agreement in writing. Use a third party such as FCI Lender Services to prepare the loan documents. For an investment, have your lawyer prepare an agreement detailing how much of the company each partner owns, the liability of the owners, and other details.
If people turn you down, ask them for names of others who might be interested. Also ask for feedback. Do they think your business is not viable, or do they not have access to cash right now?
Working with Suppliers
To help keep the cash you do get, try to get your suppliers to extend favorable credit terms. Instead of paying your vendors “Net 15,” negotiate for “Net 30” or “Net 60,” and make sure they don’t charge interest. This type of revolving credit account will help your cash flow.
Factoring accounts receivable means you hand over your invoices to a company that gives you a percentage of the amount due to you. After they collect the money owed you from your customers, the accounts receivable company sends you the rest of the amount, minus some fees. To qualify, you must have already generated these sales, and your customers must be creditworthy.
Other Online Resources
Prosper.com matches people who need to borrow up to $25,000 with people who are willing to lend the money for interest rates up to 29 percent. When you sign up, you supply your bank account and other information and agree to a credit check. Then you post your description of why you need to borrow the money. People bid on your listing, and if someone makes you the loan, you make payments for three years.
Lenders and borrowers pay Prosper.com a small percentage of the loan amount. There are many requests for business start-up funds on this site, so make your proposal clear and convincing. You can increase your funding chances by inviting friends to write an endorsement, and by joining a Prosper.com group that has a good history of repayment.
Try businesses such as E-Loan, which operates as a broker and a lender, to find a business loan, equipment financing, and other funding.
Also consider selling your old equipment or even unwanted items on eBay or Craigslist, and use the proceeds for your business. You can even use the classified section of MySpace.com to sell items.
You can also use the Internet to meet people who might help you find a loan or investor. LinkedIn.com helps you find people through your friends and their friends. MeetUp.com can put you in touch with other entrepreneurs who can give you advice, including where to find start-up financing. And Facebook obviously has small business groups.
Many colleges and universities offer business plan contests through their business schools. Some contests allow non-students to enter. The first prize is often thousands of dollars in start-up money.
Once you get your start-up financing, look at your plan again periodically. Shift your focus from getting start-up funding to generating revenue. Getting the initial financing is not the most important thing; making sales and growing the business is what will make your business succeed. HBM
Nora Caley is a freelance writer based in Denver. She specializes in business articles.