Chapter 5: Financing
Identify potential sources of funding if needed
It may be that you will be financing the startup yourself. If so, that will simplify your life immensely.
If you do not have funds required to finance your startup, other options include:
• Personal loan from family or friends
This is an area in which you will want to tread lightly, if at all. Many relationships have been soured by misunderstandings and broken promises when friends and relatives borrow money. If you decide to go this route, keep the transaction as businesslike as possible.
Don’t assume that anyone must loan you money just because they are your friend, father, brother, what have you. Remember, the money they possess, they have probably worked very hard to earn it. Whatever you do, don’t adopt the “entitlement” mentality. They don’t “owe” it to you.
Have an agreement written. It doesn’t have to be as detailed as a bank loan agreement, just state how much you are borrowing and what the terms are, including penalties for late payments.
• Investment by family member or friend
A similar option is for a family or friend to invest in your business. Give them a percentage of your company. I wouldn’t recommend this option for most people, again due to the potential for misunderstanding. There may be differences of opinion as to how much involvement the investor should have in your business. Be aware of those pitfalls before proceeding.
You will also want to ensure that the business you select will be amenable to this arrangement, especially if you will be allocating expenses, revenues, and profits on percentage other than the shares in the company.
• Bank loan
Of course, a bank loan is always an option too. If you have done a good job with your business plan, it will make the process much smoother.
For many small businesses, what we are talking about is an SBA loan. What is an SBA loan?
An SBA Loan is a business loan that is made by a local bank. The loan is guaranteed by the United States Small Business Administration. If the borrower doesn’t pay the loan, the SBA steps up and pays back the bank for a portion of the loss. The SBA guarantee encourages the bank to make loans that is would not make, if the guarantee were not in place. As you might expect, there’s a number of qualifications and hoops you must jump through.
The positive side of programs like this is it gets experienced professionals to look at your business or business plans, whether that makes you comfortable or not.
Whatever option you choose to finance the startup of your business, any funds of your own that you can include will induce confidence in your business. If others can see that you believe enough in yourself to risk your own money, they will be more likely to do so too.
There are numerous examples of people who have borrowed money for their business startup and had it backfire, whether borrowing from more traditional sources such as banks or from family or friends.
One positive example is Debbi Fields, the creator of Mrs. Fields’ cookies. When looking for startup funds for her business, she was discouraged from even trying by her family, and almost all of the bankers she approached wouldn’t touch her business. This was in the late 70’s. One banker did finally agree to loan her the money, at 21% interest.
That was clearly a gamble, and in her case, as we all know, it paid off. She is probably a multi-millionaire today due to her tenacity in doing whatever it took to get her business off the ground and running successfully. Today, she could have started an internet-based business, for very little money and used the funds from her business to finance her cookie business.
I want to be clear: I think the best scenario is not to have to borrow money at all. If you must borrow, negotiate the best terms you can, and do whatever you must to pay it back.