After several years of financial market upheaval, banks are once again making loans to viable small business proposals. But as Chicago-based author and consultant Carol Roth notes, they are determined not to repeat past mistakes.
“The fallout from the lax lending decisions of several years ago has led them to focus on the creditworthiness of the business and the entrepreneur,” Roth explains. “You want to show that you really have a viable way to generate a return on the investment so that you can pay back the interest and principal on the debt.”
While banks remain a primary small business funding options, entrepreneurs should consider some alternative sources of start-up or expansion capital.
Loans from friends and family members have long been a go-to source of funds. If the financing arrangement isn’t well structured, however, both business and personal relationships may be permanently ruined. That’s why everyone should be clear on the financing structure and the risks involved, whether the deal is a simple loan or involves an ownership stake, and repayment terms.
A similar approach called “crowdfunding” is growing in popularity, according to Roth. Here, the entrepreneur solicits money from customers or fans. “However, there are some legal implications if you do that in a traditional capital raising structure,” she warns, making prior consultation with an attorney a must.
Business planning and new venture development expert Dave Lavinsky is a big fan of individual “angel” investors. “Like a bank, they want to a return on investment, but with their own money,” he says, adding that their decision to support a venture may be driven by a desire to be part of a “cool” new business. “They may also invest because they like the entrepreneur, and want to see him or her succeed.”
Depending on one’s location, state and local economic development agencies can provide workspace, training, and administrative support; reduced rates on existing office or production space; and tax incentives. The SBA’s “microloan” program is also a good source for short-term working capital.
Then there’s you, the entrepreneur. Although self-financing options may give you more control and flexibility over your start-up capital, take extra care to ensure they are used wisely. Before you dip into your savings or tap the equity in your house, map out a realistic plan to meet existing obligations and daily living expenses, and consider the effect of “worst-case” scenarios (e.g., loss of spouse’s job, major car repairs, and serious health issues).
Regardless of the type of financing strategy you choose, evaluate the pros and cons on taking the investment and decide if the rewards greatly outweigh the risks. You can find a wealth of financing expertise at SCORE, a nonprofit association dedicated to helping entrepreneurs start, grow, and succeed nationwide.
For more information about taking advantage of these valuable services, visit http:/raleigh.score.org or contact us by phone at 919-856-4739 to set up an appointment with our experience counselors.