Six Sources of Startup Business Financing
Tips to Help you Find Startup Financing for your Small Business
Start-up businesses often have a difficult time finding sources of start-up business financing for their initial financing needs. It is often not possible to get bank loans because banks aren't interested in unproven businesses. Even with the best possible business plan, in the world of business and finance, you may not be able to convince a bank to loan any of their often-scarce money available for credit for start-up financing to a brand new business.
There is money available for those who are starting a business. You just have to know where to look and think strategically and creatively. Here are the six most likely sources of start-up financing for your new business. It is usually a good idea to try to use a combination of two, or even three, or these sources to get the start-up financing that you need for your new business.
As hard as it sounds, bootstrapping your start-up business really may be the best way to go. If you find a way to finance your business yourself, you don't have to answer to any investors and you have total control of your business. Bootstrapping requires serious strategic thinking and planning.
Raising funds yourself may involve pledging your own assets. Since the largest asset most people have is their home, you may find yourself in the position of taking out a home equity loan on your home. You only want to do this if you have an iron-clad business plan as pledging your home is not something that should be done casually.
Since the recession, banks are not making as many home equity loans and they are usually making them for only about 80% of your home's value, if that. You have to have a spotless personal and business credit record to qualify.
The good thing about financing your startup business with the help of family and friends is that you can often get fairly lenient repayment terms. That may be important in the initial years of your new business. They may give you a low interest rate and a long time to repay them. On the other hand, they might want a stake in your firm if you are agreeable.
One problem is that in hard economic times, family and friends may not have access to the capital they could normally access.
This is the most popular loan program for startup businesses. The Small Business Administration (SBA) does not make loans to start-up businesses but they guarantee a portion of loans start-up businesses apply for through banks, insurance companies, and pension funds. This makes it easier for start-ups to secure bank loans when otherwise the banks would not be willing to loan the money.
Banks are still careful about making loans to start-ups because the non-guaranteed portion of the loans is still their responsibility to collect. The loan guarantee does make loans for start-up businesses possible. Be prepared for a lot of paperwork and don't get discouraged because of paperwork or a long wait. The SBA quite simply increases the availability of credit for small start-up business firms.
Small Business Innovation Research Grants (SBIR) and Small Business Technology Transfer Grants (SBTT) are wonderful sources of financing for your small business if you can qualify for them. Eleven federal agencies give out considerable funding every year to small business startups that have innovative ideas in line with their missions. Examples of agencies that give out SBIR grants are the Departments of Agriculture, Energy, and Defense along with eight others.
Phase 1 grants are meant to support market research in the early stages of the startup business. Phase 2 grants require a very well-developed business plan culminating in how your research is going to culminate in a salable product, but the grant money is big if you can get it.
SBTT Grants have the same Phase 1 and Phase 2 grant procedure. Only five federal agencies offer SBTT grants. In order to qualify for a SBTT grant, you must be teamed up with some sort of non-profit organization, like a university. The application process is very competitive, but don't let that stop you.
If you have a good idea, business grants are worth pursuing. Check out the government site for grants regularly. Also, check out, as an example, the 2010 solicitation dates for applications for the SBIR grants. You'll see some of the ideas for which they are soliciting grant applications.
Angel investors provide either start-up or second-tier financing for small businesses. Angel investing dropped during the recession but is making somewhat of a comeback. Angel investing is addressed in the financial reform act currently being debated in the House and Senate and may change a bit as a result.
Angel investing is a type of equity financing. In return for an individual investing in your company, you give that investor a percentage of ownership in your company. Angel investors typically don't make really large investments so their percentage of ownership may not be large. Often, however, angel investors are interested in having input in how the company is operated. You, as a small business owner of a start-up, can very often benefit from the expertise angel investors have to offer.
Angel investors often have certain characteristics by which you can identify them. There are general sources where you may be able to find angel investors to help finance your start-up as well as more specific sources of angel investors.
Since the Great Recession, new financial reform legislation has been introduced in Congress. One of the possible provisions is that "accredited angel investors" would be required to have substantially more net worth than they are currently required to have. Another provision is that there would have to be a waiting period in which funds from angel investors to startups would be held in escrow for a period of time. This would cause startups to have to wait to undertake their businesses.
- Small Business Administration 7(a) Loans
- SBIR and SBTT Government Grants
- Angel Investors
On top of this is the fact that investors' net worth has dropped during the Great Recession and there are fewer investment dollars for angel investors to spend. There are, quite simply, fewer angel investors out there. The worry is that the provisions of the financial reform bill would cause there to be even fewer angel investors in the market. Please note that the financial reform bill was not in its final form at the time of writing of this article.
Small Business Investment Companies
The Small Business Investment Company Program was developed to provide venture capital to small businesses. They are private, profit-seeking investment companies licensed and regulated by the Small Business Administration (SBA). They are an excellent source of equity capital to small businesses. The SBIC supplies a list of investment companies that participate in the program to small businesses.