Advice: How Do I Raise Money for a Business?

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Inquisitive entrepreneurs and small business owners can find inspiring insights and common sense answers from two industry pros on MainStreet.

Each week Dani Babb, a small business expert and the dean of Andrew Jackson University's College of Business in Hoover, Ala., and Dr. John Rutledge, the chairman of private equity investment firm Rutledge Capital, offer their advice to scores of entrepreneurs and small business owners. They are also frequent commentators on Fox Business News.

This week they respond to a question from Mary from Arkansas about small business startup funds.

Mary: "How do I get money to start my business?”

Babb and Rutledge: Mary, there are many ways to get money to start your business!

Even though credit is tight there are still lots of options. The right source of money for each entrepreneur depends on the business, the amount of money needed and the potential return.

Try the Small Business Adminisration for starters. We always recommend that a business check into the SBA, which has a lot of options for individuals wanting to start businesses. They offer loans of up to $500,000 with 10% collateral under the new rules.

However, getting money these days isn’t as easy with tightening lending standards. If you do go the SBA route, be sure you have the business documents required by the SBA before you hit the bank.

If you're starting a business as a sole proprietorship, you'll need good credit. If your personal credit score isn’t so hot, Mary, consider creating a new LLC that will let you “start over” in many respects with regard to your financing options.

Another option is to BYOB, or be your own bank. Do you have an attic, closet or garage full of stuff you aren’t using?  Many businesses, particularly online businesses, can be started with less than $5,000. Sometimes you can sell enough stuff on eBay (Stock Quote: EBAY) to start your new venture and avoid owing money to anybody. Do this before you approach other sources of capital—it’s always your lowest cost source of money. We helped a business owner two weeks ago that found more than $7,000 worth of “knick knacks” in her closest was able to get her online business started. In about three months she will have an e-commerce store!

Be careful when you approach family and friends. Many business owners say their first round of funding started with friends and family, and yours ma,y too. Those who are closest to you may be the best chance to raise capital; but its cost can be much more than the interest rate. To avoid family tensions, be sure to get an agreement in writing because even the best of businesses can be derailed rather quickly if family money issues come into play. Family holidays can become unenjoyable events. Keep business about business!

If you have a home with equity, you have yet another option—to take out a mortgage. There are a few ways you can do this. One is to get a home equity line of credit. The interest rate is usually variable but you can draw from the line as you need it. Another option is to take out a second mortgage on your home to finance your business, and a lot of people do. Usually, you’ll have the money up front, which means you will need to pay interest from Day One. Money is fairly inexpensive these days. Just be prepared to pay this loan back, whether your business is successful or not.



Credit cards are another option. More than 15% of businesses, including both of ours, started at least in part with personal credit cards. This is OK if you expect to be able to pay it back quickly or can lock in a good deal (a low rate for 12 months or longer) from the bank. If you have an LLC, be sure you take the credit cards out in the name of the LLC and use its employee identification number (EIN) instead of your personal Social Security number. But for startups banks will want a promise that you as an individual will pay off the balance, even if your business cannot.

Many people believe that venture capitalists (or VCs) are the answer.  In fact, while VC money gets all the press, it’s not right for most simple businesses. VCs work with less than 1% of businesses and primarily invest in "bugs and drugs:" software, biotechnology, pharmaceuticals and green technology. The best way to get into this community is referrals from others who have received money from a VC. But chances are, if you are starting small and aren’t going green, you won’t get much help from these guys.

Finally, Mary, consider angel investors. Angels are usually local rich guys and gals who back early stage ventures for an ownership stake in your business. Angels invest their own money, unlike VCs. They want very high returns and the potential to earn five to 10 times their original investment within five years. Be cautious here: They will want an equity stake in your business or they will want you to have a plan to take it public. This may not fit your needs.

Good luck!


Related Stories:

How to Win the Venture Capital Race

Raising Capital for Your Small Biz

Business Loans: What Are Your Options?

 

 

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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