Every business owner knows having enough money to run the business is mission-critical. Everything needed to do to turn the idea into a viable business requires money.
It is important to have adequate capital not only when starting a business, but also have a plan in place to continue to infuse the business with capital in order to support the growing operations.
There are so many resources and options for entrepreneurs and business owners when it comes to business capital.
Personal Savings & Retirement Funds
The key to using personal savings is avoiding the need to rely on third parties, investors, or a financial institution. In business, “bootstrapping” means starting a business without external help or capital. However, there is a higher risk of personal loss.
There is the possibility of using IRA and retirement funds as another means to fund a new business. This option is complex. Using an IRA to buy or fund a business is not a prohibited transaction as long as the correct vehicle for that money to fund the business is used. It’s extremely important to work with people who have experience in structuring these types of transactions.
Bank Credit & Financing
It is important to develop corporate credit for the business that is separate and apart from personal credit. When starting a business many banks have business relationship managers, and it is their job to work with business owners to help them obtain direct bank financing as their business grows. Bank financing can be established by working with the banker that you have established a relationship with.
As a general rule, banks look for at least two years of business credit and generally 20 to 25 percent of the loan amount down.
Funding from the bank would involve the usual process of sharing the business plan and the valuation details, along with the project report, based on which the loan is sanctioned.
If qualification for bank financing is denied another option is obtaining a home equity line of credit, which has more favorable terms to some small business association (SBA) loans. It offers flexibility and is a good alternative if an entrepreneur wants to finance the business from the start. The business owner would loan the money to the business entity pursuant to a promissory note that gets paid back over time, or it could be a straight capital investment into the business.
Microlenders are financial institutions—quite often nonprofit mission-based organizations—that have a mission for helping small businesses grow and develop by providing them with lending resources. Where microlending is unique is in the intent behind the loan. Microlenders are interested in investing in the development of an idea or business. The main goal of a microloan is to help a small entrepreneur who may not have access to traditional funding and would not otherwise be able to borrow money.
Along with loans, microlending bodies often provide coaching and training to build a strong business foundation. In turn, this helps ensure that the borrower is eventually able to pay back their loan.
Small Business Administration Loans
A well-known resource for raising business capital is Small Business Administration (SBA) loans. The SBA website has tons of information about the type of SBA-backed loans.
The most common SBA loan is the 7A loan. These are loans that are used to acquire a business or to buy another business. For example, if a current franchisee is interested in buying more franchise locations a 7A loan is a potential option.
There are three types of these 7A loans.
- The standard 7A SBA loan that has a maximum of up to 5 million dollars.
- The small 7A loan, which is a maximum of 350,000 and is guaranteed by the SBA that has a guarantee of up to 85% of the loan up to $150,000 and up to 75% of the loan amount above $150,000.
- The Express 7A small business loan has a max of $350,000, but expedites the response from the SBA from two or three months to within 36 hours.
Additionally, an 504 SBA loan is a great program when buying a commercial property.
Friends & Family
Raising capital through friends and family is a viable option for many. It is one of the most common forms of raising capital. However, statistics show that 80% of these partnerships fail. What makes a good friend does not necessarily make a good business partner.
The types of resources for business capital that come by way of friends and family as investors or partners require a documented exit strategy from the start. It is very important to sit down together to make sure that expectations and understandings are documented.
A partnership agreement should include a mediation first provision, which basically means that in the event of a dispute between friends-family partners and investors that the parties will present themselves to a neutral third party through a mediation process to resolve those disputes before going to court.
Clearly, the urge to engage with friends-family partners and investors is sometimes quite compelling in order to get the financing for a business. However, it has many risks and needs to be properly documented in order to have a successful business.
In some cases businesses will go to outside investors, which could include private, equity, venture capital, angel investors, and/or crowdfunding. Each comes with pros and cons.
The SBA has Small Business Development Centers (SBDC) throughout the U.S. They are a tremendous resource for obtaining free information and speaking with counselors about what to take into consideration when starting and growing a business.
Additionally, the knowledgeable team at Chase Law Group, P.C. is always available to answer questions and provide consultation for small businesses. Find a free report about building a fortress around your business at DAnnchase.com to download. Our exclusive newsletter provides legal services when necessary for entrepreneurs and small business owners. Sign up in the upper right corner on any page on this site.