Finding Money Advice

Believe it or not, even in these goofy economic times, there really are lots of lenders and investors out there, and they really do want to lend to, or invest in your business (despite the media caims tyhat credit mis tight). That’s how they make money, after all.

Banks supply most of the money for small businesses, almost 70% of them have some form of bank credit. Finance companies run a distant third behind angel investors. And, it might surprise you to know that, in spite of their visibility, less than one percent of small businesses find start-up money from the U.S. Small Business Administration (SBA) and other government programs, venture funds, mortgage bankers, insurance companies, public markets, or grants! While all that may sound discouraging, take heart in the fact that one percent of U.S. businesses is still roughly 270,000 companies, and most of the other 27.2 million (obviously misguided) company owners probably won’t visit this website or read our ebook.

We cover all the following topics in a lot more detail in the Finding Money ebook, but let’s take a closer look at all the investors and lenders who can provide the money you need.

Angel Investors

Individual investors include two types of people: those who know you, like you, or love you enough to provide money with few or no strings attached (your most likely source of money), or successful folks who invest in businesses because they believe it will beat the return they could see from more traditional investments. Referred to as angels, angel investors are a huge source of informal venture capital, and the largest source of seed and start-up money. In 2006, for example, angels funded about 51,000 deals.

Okay, so you don’t know anyone that is willing to fork over the money you need in the hopes you (and thus they) will make it big. So where else can you look?

Banks

Bankers rent money. Depositers, in a sense, loan banks money and then banks turn around and loan you the money. Banks pay depositers interest for the use of the money and then loan the money to you at a higher interest rate. The higher rate covers the interest they pay depositors, the bank’s expenses, and some profit. (Recent bail-outs notwithstanding, banks assume most people will replay the loan. Those that don’t contibute to the banks expenses and your higher loan interest rates.)

Banks vary widely in their product offerings and risk appetite, and it’s not at all unusual for the same loan request to declined at several banks but approved by another.

Business loans from banks range from a minimum of a few thousand dollars to a maximum based on the size of the bank and their risk appetite. Lenders will require personal guarantees (joint with spouses) and personal collateral—especially if you don’t have a strong credit history, reliable cash flow, or offer enough collateral. Your home will probably be taken as additional collateral on such loans, so don’t feel like you’re being singled out if they want you to pledge everything you own including your first born. Think of it from the bank’s perspective: if you don’t think it’s worth the risk, why should they?

Consumer loans come in a variety of shapes and size and we explain how you can legally obtain them for business use in the Finding Money ebook: Uncollateralized Personal Loan, First Mortgage Refinance (with cash out), Second Mortgages and Home Equity Loans, and Home Equity Lines of Credit. Credit guidelines, consumer debt test standards, and loan-to-value criteria vary from one lender to the next. When times are good some lenders will stretch on collateral tests, others will stretch on the cash flow tests (yes, we explain the tests in detail in the ebook) especially if you have good credit, lots of equity, a small mortgage balance, strong personal cash balances, or a high score on the consumer debt test. Now? No so much.

You can also find money from finance companies and by leasing. Almost any fixed asset can be leased, right down to the silverware for a restaurant. Starting an airline and need a couple of jets? Guess what? They don’t come with engines, you lease them separately. These are major sections in the Finding Money ebook, and it includes a lot of helpful details on making buy/lease decisions.

Small Business Administration

But what if you can’t find an angel to invest in your company, a straight bank or finance company loan doesn’t seem possible, and you don’t need money for equipment so a lease is out? Maybe the SBA can help, by guaranteeing a loan for you. The bulk of SBA lending is accomplished through authorized bank and non-bank lenders with the SBA guaranteeing a portion of the deal. They have a daunting variety of programs, but we sort them out for you in the ebook.

They have special programs for projects that involve the purchase, construction, or improvement of land, buildings, equipment, and other long-term fixed assets. If you’re a new or small contractor but need to have bid, performance or payment bonds they have a program to help you out. They have a program that provides guarantees on short term lines of credit you can use to cover the cost of labor and materials needed to perform a specific contract. Or if you’re in a highly seasonal business they have a program to see you through. Are you a Vietnam or disabled veteran? They have a program for you too with loans range from $1,000 to $150,000 that can be used for construction, expansion, leasehold improvements, equipment, inventory or working capital. And there are programs for the handicapped, exporting companies that want to develop a foreign market, and even for companies that have been hurt by foreign imports.

Special Government, Quasi Government, and Private Initiatives

These programs are funded by federal, state, and local government agencies that are aimed at promoting economic development might be a solution for you. Program objectives often include the creation of jobs for low income people, and the acquisition of fixed assets (land, buildings and equipment) particularly in low-income, distressed, or economically-disadvantaged communities. Many of these special lending programs offer extremely low interest rates (often lower than the Prime rate), longer than normal repayment schedules, and flexible underwriting standards.

Factoring

If you have an established business and are having accounts receivables problems there are so-called factoring companies purchase your accounts receivable and immediately advance 50% to 80% of the face value of the receivables to you. The balance of the funds are released once the receivable is collected, less the factor’s discount. This discount is how the factor makes money, and the discount can range from 1.5% to 5% of the face value of the receivables. There’s a lot to know about factoring, and a lot of interesting options, so we cover the topic in detail in the ebook.

Venture Capital

If you’re trying to find money, attracting a venture fund is certainly one way to do it; but you, your product or service, and your company are going to have to be very special. Most venture firms focus on emerging technologies, and are primarily interested in companies that have proprietary products or services, although there are exceptions. Retail or consumer deals are of interest only if they offer strong national or international expansion potential.

Details about raising money from venture capital sources is provided in the Investor section of this site and in Section Three of the Finding Money ebook. In general, venture funds invest in companies that offer (these are topics in the ebook, hence the capitalization) Proprietary Products or Services, Huge Market Potential, Proven Management Talent, and Extraordinary Returns.

While the venture community is known for its incubation of start-up businesses, the majority of their funds go to more established companies—the typical venture-backed company, when financed, was three years old with 42 employees. In 2007 only 65 start-up companies won seed financing, less than 2% of all venture investments that year. In any case, the competition for venture capital is fierce and few will look at deals of less than $250,000—it’s just as much work to do a small deal as it is a large one.

The Investor section here and Section Three in the ebook (where you’ll find insider secrets about how investors evaluate proposals and structure their investments) covers this topic in more detail.

International Finance

More and more companies are exploring international markets as they contemplate business expansion. But exporting is complicated and potentially risky business—one of the biggest risks in exporting is the risk of not getting paid. That risk has two components, company-risk, which involves the creditworthiness of foreign buyers, and country-risk, which involves the political and economic stability of country in which the company resides. Fortunately, bankers and other lenders have developed special loan and insurance products to help you manage and mitigate these risks. In addition, a number of government programs offer both assistance and financing for businesses involved in international trade.

The SBA’s export programs were mentioned above in the part on SBA loans. Other international financing programs are available from the Export-Import Bank of the United States (Ex-Im Bank) whos mission is to create U.S. jobs by financing and facilitating export of U.S. goods and services. They have a number of programs including Export Credit Insurance, Working Capital Guarantees, Foreign Buyer Guarantees, and Foreign Buyer Direct Loans. The Overseas Private Investment Corporation (OPIC) is a self-sustaining agency of the U.S. government that serves to promote economic growth in developing countries by encouraging U.S. private investment in those nations. They have a Finance Program and offer Political Risk Insurance.

Mortgage Bankers

Mortgage bankers make (or, as they call it, originate) real-estate secured loans that are either held for their own portfolio or sold to other lending institutions. Their rates and fees are competitive with bank lenders, although some offer a higher-priced alternative for marginal loans or difficult properties that banks wouldn’t touch at any price.

Insurance Companies and Pension Funds

Life insurance companies and pension funds often invest a portion of their money in real-estate secured loans and venture capital funds. Their activities as a direct lender may include long term financing for real-estate, but they tend to focus on very high quality income-producing properties. Minimum loan size is $1 Million and higher. Rates and fees tend to be lower than commercial banks and loan terms are generally twenty to thirty years. Insurance company financing is a good choice for large, top-quality real estate projects (including office buildings or shopping centers) in locations that have proven cash flow. Mom and pop start-up Internet business? Fugetaboutit.

Public stock offering

A public stock offering or ‘going public’ as it’s called, is not a common form of finance for new and emerging companies due to the cost, the temperamental nature of the market for initial public offerings (IPOs), and the mountains of red tape. Don’t even think about going public unless you can make a very good case for how you’re going to manage the public’s money, unless you can prove that you’ll provide a high rate of return on investment, and unless you’re willing to risk over $500,000 just to fund the IPO process (and just because you spent the time and money preparing for the IPO, there’s no guarantee your offering will be successful.)

Joint Ventures / Co-ops / Strategic Alliances

Often the resources of two companies, even Fay Ray and King Kong, can be brought together to find a unique approach to solving financial, technical, and strategic problems. Surprisingly, even a competitor might help out.

Grants

Grants are available from a wide variety of sources for non-profit organizations, but some programs are open to for-profit companies too. Federal grants for technology related ventures that address specific needs of the Government are available from the Small Business Innovation Research Award Program (SBIR) Program. No they don’t give away free money. Take a look at the kind of projects that might be funded by a grant:

Spoken Language Interface to a Mission Planning System
Electrochemical Stripping of Aircraft Coatings
Prenatal Drug Exposure and Child Development
Micro-Turbojet Engine
Compact Infrared Zoom Lens Design
Neural Network Limit Avoidance System for Rotorcraft

But if you’re a geek and know your technology, there’s nothing better than a grant when it comes to financing. Just don’t expect it to be easy or happen fast. But we’ll show you the way.

Accounts Receivable Insurance, Credit Insurance and Letters of Credit

There are a number of ways  gain or improve conventional financing. Many businesses use credit insurance as a sort of half-way house between a factoring relationship and conventional financing. Companies with credit insurance may find it easier to obtain conventional accounts receivable financing because lenders can be named as a beneficiary in the event of bad debt—greatly reducing their risk. Letters of Credit are another way to make your accounts receivable, and even your purchase orders, more financeable.

By now you’ve probably begun to figure out which kind of lender or investor is most likely to help you find the money you need. But how do you make sure that your request jumps to the top of the pile and sails through the approval process? Our Lenders section here, which is Section Two in the Finding Money ebook, will give you the inside scoop on what make’s lenders say yes, and the Investors section here (Section Three in the ebook) will show you how to dazzle investors.