Livin' The Dream

Funding Sources

There are a variety of ways to finance your business. Leo offers some ideas on this page regarding the various avenues you might pursue. But before you begin asking for money from someone else, you must do two things:

1) Carefully analyze your own personal finances, and

2) Develop a business plan, building a strong case for the business you want to start or purchase.

If you attempt to ask for money in general terms, you won’t get more than general responses. So, once you are serious about the business you want to get into, seriously develop a strong business case. Your documentation will have to be formal if you apply for funding through a formal institution, like a bank. In some cases, the funding source may help you develop the formal business plan documentation, but YOU still have to identify the components of your plan. If you hope to borrow from your family, you will need less formal documentation, but you still need a very well thought out and documented plan.

Personal Family Savings

Consider using funds sitting in a personal bank account (Savings or Checking). If you intend to borrow money, regardless of the source, plan on investing some of your own money as well. This demonstrates that you believe in yourself and your ability to start a business.

Bank Business Loans

You may consider borrowing from a bank for start-up expenses, working capital, equipment, etc. There are a very wide variety of commercial loans out there. You should plan on talking with several banks to understand all of their options and policies. Not all banks are alike, so even if you submit identical business plans to several banks, they will not react identically. One bank may reject you and another may accept you. So do not take it personally if you are rejected. Just move on to another lending source.

Credit Cards

Credit Card companies are doing everything they can to entice you to use their plastic. Before you attempt this, carefully research the rules regarding interest and cash advances. There are some good deals out there that will give you access to cash without interest due for an extended period. But READ THE FINE PRINT. Credit Cards are best used for short term funding.

Second Mortgage (Home Equity)

If you have enough equity in your home, you could think of using some of that equity to invest in your business. As a home owner, if you want to borrow money from a bank, chances are the bank will want to use the equity on your home for collateral anyway. So, you might as well consider borrowing the money directly from yourself. Typically, Home Equity Line of Credit accounts charge lower interest rates than commercial loans. Also, you can borrow the money in increments from yourself as you need it. You do have to be disciplined and set up a repayment schedule, including principal as well as interest.

If you are thinking of quitting your job to start a business, and want an Equity Loan, get one BEFORE you quit. Remember, you don’t have to use the funds, so even if you are not sure what business you will be getting into just yet, prepare early by establishing your Equity Line of Credit.

Outside Investors

There are individuals (not family members) who are looking for alternative ways to invest their money. Typically, they have a diverse portfolio already, but feel they need additional investment avenues. They usually do not want to participate in the business operationally – they are interested in the financial return, so they are likely to be a “silent” partner. Such investors will certainly want to see credentials and a strong business plan before they will invest. You can only learn about these outside investors through word of mouth. If you are interested, contact Leo for more information.

Government Grant Loans

Grant money for a for-profit business is hard to come by. If you are considering starting a non-profit business, you can apply for a grant. You will need some assistance, so you should contact a specialist in this area. Contact a Small Business Development Center (SBDC) in your area for further information.

SBA Type Loans

The Small Business Administration (SBA) provides a number of financial assistance programs for small businesses including 7(a), 504 and disaster assistance loans. The SBA is the guarantor for the loan. You arrange to borrow the funds through a bank, and the bank will determine if an SBA loan is right for your situation. SBA loans have higher interest rates than standard commercial loans, but they may require a smaller investment from the borrower. Remember, the bank will still establish the rules for the loan, not the SBA. The SBA typically requires additional paper work.

Venture Capital

There are investment organizations that are interested in helping businesses get started or to grow. As with outside investors, venture capital organizations will certainly want to see credentials and a strong business plan before they will invest. You can also expect that they will be aggressive in looking for their return on investment, and they may want an active voice in setting and monitoring the direction of the business. Venture capitalists do advertise. They sometimes go by the name “Angel Investors.”

Retirement Funds

Most people believe that they will incur penalties or a large tax burden if they take money from their retirement funds before they reach age 59½. But there are a couple of ways to take advantage of your retirement dollars.

First, you are allowed to borrow up to $50,000 tax-free from your 401(k) retirement account. Any business with no employees can establish a self-employed 401(k) plan that comes with a loan feature. Your business may be well-established or in start-up mode to take advantage of this.

Another way is to roll retirement funds into a C-Corp 401K plan, and then use the funds to start or expand a business. There will of course be a fee for the service to establish your business as a 401K investment, but it may be substantially less than the penalties, depending upon the amount you want to use for your business.

For more information on these plans, contact Leo or review these links:

Guidant Financial Group

Benetrends, Inc.

SD Cooper Company

Local Micro Loan Programs

Micro Loans are suitable for very small businesses, where the funding needs are relatively small, typically less than $50,000. Often, they will provide funds after you have been turned down by a bank. Micro Loan programs may be available in your community. To learn more about what might be available in your area, contact your local Small Business Development Center (SBDC). State Programs There may be other programs available at the state level. For example, in Illinois, there is the STEP (State Treasurer’s Economic Program) Small Business program. It encourages the creation and retention of jobs and business activity, recognizing that small businesses are often where today's jobs are being created. The program gives small businesses the ability to get a low-interest loan to help them get up and running or to keep them in business giving them a better chance of survival and long-term success. If your business is outside IL, check the Office of the Treasurer for your state to see what might be available.

Finance Broker

When you want assistance in finding a funding source, you may want to explore working with a Finance Broker. They typically help you formulate a sound business plan and put together a strategy with you for funding your business. Then, they will “shop the loan” for you. This can save you time, though there will be a fee for the service.

For more information on these plans, contact Leo or review these links:

IRH Capital

Business Resource Store

If you have additional questions about funding your business, send an email to Leo Wisniewski.