Funding a New Business Venture
The excitement of going into business for yourself and being your own boss is often quieted by the realization that a great deal of work and resources need to be proffered before the dream can become reality.
Obtaining funding for the business is oftentimes the most frustrating of the steps needed to open up the business. We find entrepreneurs are especially frustrated when they go at this process with a “one size fits all” comprehension of getting their venture off the ground. There are many ways to gather the dollars you need to ensure your business starts off strong and has enough capital to keep it growing.
Damon Chaffin, Business Consultant (email@example.com) offers up a few things to consider when you are deciding on the direction you need to go for your small business needs.
Bank Financing: Whenever we think of financing, typically we think of going to a bank and borrowing the money. Since this is the most often used method, we will address it first. Banks want assurance of repayment by requiring personal guarantees and a secured interest on personal assets like your house. Interest rates can vary based on the size of the loan and status of your credit. The key is to shop around. Some banks get servicing fees from selling the guaranteed portion of the loan and may be willing to offer you a better rate.
Bootstrapping: Many entrepreneurs find a way to grow without external financing so that banks, partners, or other lending sources don’t control their destiny or control a large portion of the business.
Friends and Family Members: Friends and family members might be the most lenient investors you can find. You typically won’t have to pledge your house and the terms are usually less onerous than other sources. A word of caution, treat these interactions like business transactions not personal loans. We all want to have a nice time at family gatherings not avoid Uncle Joe like a bill collector over the holidays.
CrowdFunding: While this process has been around for several years now, it is still relatively new to funding franchising businesses. It is usually done via the Internet. Investment crowdfunding is where businesses seeking capital sell ownership stakes online in the form of equity or debt. In this model, individuals who fund become owners, shareholders, or debt holders. Reviewing past issues of this news format will help you to identify many funding options. Make a note, many of those online programs that were strong a year ago are no longer around. Do not get caught up on the hype of easy money. Entrepreneurs need to practice due diligence in order to understand which platform is best for them.
Microlending: Recipients of these types of loans usually are looking at small amounts (typically under $10K with the average being around $5K). This financing is typically reserved for those with credit generally between 580 – 625, however you will need equity in personal assets in order to qualify. These loans typically come with higher interest rates and fees attached. Again, due diligence is the key.
With all financing sources you will need to provide a business plan that clearly states the business purpose, how you will make money, your competitive advantage, and 3 years of projected financial statements. You will also want to include bios of yourself and all critical staff with an answer to why each of these people are qualified. Whenever a funding source is looking at a prospective applicant, they are asking themselves three questions: 1) How will the business make money; 2) How will they pay me back the money I’ve loaned them; 3) If they can’t pay me back, what are you willing to give me so I can get my money back? Seldom will they ask the questions that bluntly, but rest assured this is what they want to know.
In addition, all sources will run your credit history and score. Obviously, the higher the better as this shows you have consistently paid your debts in the past in a timely fashion. Lastly, they will want a personal guarantee, equity, and an investment by you in the business (skin in the game).
One final note: Be sure to add in adequate working capital to your financing package. One of the top reasons for businesses failing is lack of working capital.
Feel free to contact our Center at www.vetbiz.com with questions on financing your business venture. Happy Holidays.
Darcella K Craven has over 20 years of experience in corporate, government, non-profit and military organizations. She is currently the Executive Director of the Veterans Business Resource Center, a non-profit organization dedicated to assisting Honorably Discharged Veterans, National Guard and Reservist and Active Duty personnel and their families with transitioning back into civilian life with starting and expanding businesses. An Army Veteran, she holds a Masters of Arts in Management from Webster University and is currently pursuing her Doctors of Management focusing on impact of military experience on small business decision making. Darcella has been featured in numerous articles for her transition from the military and the welfare system to an accomplished business woman and is actively involved in many civic organizations.
Article co-authored by Damon Chaffin, VBRC Business Consultant