“Where can I get money to
start my business?” That is one of the
most commonly asked questions when aspiring business owners visit our offices.
Because one of the most
common reasons for new business failure is the lack of working capital needed
to keep the business operating until it develops a positive flow, it is an
important question.
Invariably, the first thought
turns toward availability of grants.
When considering a ‘for profit’ company, grant funding is almost nonexistent. In some specific industries private
foundations may offer some funding, but for the vast majority of business
starts, the answer is “no grants”. When
considering a ‘not for profit’ organization, some small grants are available on
a competitive basis.
The most common source of
funding for a business is through more conventional lenders like banks and
credit unions. Many of the same factors
lending institutions evaluate for a personal loan are considered with a business
loan: borrower’s credit score, a collateral requirement, and the ability to
repay the loan are part of the decision process. It is important to note, not all banks lend
on the same projects nor do they evaluate on the same criteria. So, you may need to shop around to find a lender
who will be the right match for what you’re planning. Another important point to remember is
lenders will not loan 100% of the funds needed for a new business and will
expect the prospective owner to provide funds in some form such as cash, land,
building, or equipment.
Another avenue to finance a
new business is to enter into a partnership arrangement with an investor. This arrangement often means the owner will
sacrifice some authority over the business in exchange for funding and it is
not the best option for everyone. If
this path is chosen, the rights and responsibilities of each partner should be
written into a partnership agreement. This agreement spells out the terms of
the relationship and can detail income distribution, ownership percentages,
decision making rules, succession plans, and dispute resolution. Because this
can be a complex document, we encourage entrepreneurs considering this to
engage legal counsel experienced in writing this type of agreement.
Family members and friends are
another potential source of fund. Obtaining money from them may seem like an
easy way to bypass some of the issues with traditional lending sources.
However, funding in this way should be treated as a business transaction documented
and supported by a loan agreement. That
agreement should detail the terms of repayment including due dates, payment
amount, interest, and collateral if the loan is secured. If the money is considered an investment in
the business, then the same considerations we just discussed about taking on a
partner would be relevant. Writing down
the details of any funding transactions from a family member will help ensure
everyone involved understands the scope, purpose, and nature of the investment. Here again, we encourage entrepreneurs to
seek professional advice from someone experienced in this type of arrangement.
A relatively new option for
financing is call crowd funding or crowd financing. Much like the name suggests, the source of
funds comes from smaller private individuals or “the crowd”. These funds can be directly sourced from the
public or through third party organizations.
Donor based funding, credit based funding, and equity based funding are
examples of crowding funding types and each carries a unique set of risks. This is not for every situation, so, do the
necessary research to see if this would work for your business.
Finally, in some cases,
government agencies will lend funds or offer guarantees for loans. Check with the respective agency to determine
what is available under each program.
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