From the February 1997 issue of Startups

Use your resources to raise the cash you need.

The age-old saying that it takes money to make money still holds true today. One of the leading causes of new-business failure is under-capitalization, so be sure to cover all financial bases before opening your doors.

Without adequate start-up and working capital, it is virtually impossible to succeed with a new business venture. Based on the budget figures you've prepared, you should seek to generate enough start-up capital to cover all of your expenses for one year, assuming that you may never even take in a dollar's worth of business.

Aside from praying for a big payoff from the lottery, the simplest ways to raise capital for a new business are to put money aside each week from current paychecks or to raid an already sizable bank account. If these are not realistic options for you, though, your quest for capital must begin.

Entrepreneurs seek start-up capital from various sources, including friends, relatives, banks, home equity loans, retirement savings, and even credit cards. Some of the most common sources of start-up capital are discussed briefly in the sidebar below. Our Starting Smart entrepreneurs have returned to share their experiences with tracking down this critical cash.

Judy Proudfoot, Proudfoot Wearable Art

"The great thing about my business is that it didn't require a lot of money to get started," explains Judy Proudfoot, 45, who designs and hand-paints wearable works of art with an "Up North" flair in her Alexandria, Minnesota, home, and then sells them at local crafts shows and shops.

Proudfoot believes in starting out small and growing a business incrementally. To get started, all she really needed was a small supply of sweatshirts, T-shirts, paints and brushes, as well as the initial funds to cover crafts-show fees, gasoline, telephone expenses and postage.

"Starting out, all my husband and I could cough up for my business from our personal savings was $500, and that's all I've ever borrowed from our family funds," Proudfoot says. To generate additional start-up capital, she turned to the Foundation for International Community Assistance (FINCA). Based in Washington, DC (202-682-1510), with regional offices in several states, the foundation helps entrepreneurs form their own "income-generating groups" which, through a loan from FINCA, offer members access to a series of short-term loans. These loans provide working capital for a variety of small businesses.

"FINCA started up in my community in the spring of 1995--the same time I was launching my business," Proudfoot explains. "The foundation just happened to place an ad in the business section of our local newspaper, indicating the possibility of obtaining a small-business loan. Since this was not really an option for me from the banks in our area, I figured I had nothing to lose. I went to a meeting and was very impressed by the range of training and support FINCA had to offer."

Proudfoot learned that individuals who decide to become members of income-generating groups and take out loans do not owe the loan money back to FINCA directly; the group as a whole owes the total loan amount to the foundation, and individual loans are owed to the group. This means that peer pressure to succeed and make good on installment payments is intense because, if a borrower defaults, the rest of the members of the group are responsible for covering the debt.

"My first loan from FINCA was for $500, which I have since repaid in full," Proudfoot says. "I'm in my third loan cycle now, and things are going really well with my business so far."

Marian Fletcher, Let's Go Party

"I was only able to save up $1,500, but that was enough to get me into business on my own," says Marian Fletcher, 55, who has been operating a profitable party-planning and catering service in Baltimore for the past two years.

"The nice thing about the kind of work I do is that it doesn't require a whole lot of money to get started," Fletcher explains. "Most of my work takes place in the homes and offices of clients or in rented meeting halls. I always receive a down payment in advance of the event, usually one-third of the total amount due, so I don't need to spend much of my own money to find an adequate workspace, and I have the luxury of spending the down payment I receive to cover most of the expenses for the job."

A few months after launching her business, Fletcher realized she needed a bit more money than she'd originally anticipated. She looked to her daughter for help, then turned to an outside source, as well.

"My daughter gave me $3,000 to help me expand my business," says Fletcher. "This enabled me to buy some equipment I needed. A bit later, I became a member of an income-generating group with FINCA, taking out a loan for $500. Although that may not sound like a lot of money, it helped me to purchase additional business essentials, including commercial equipment, beautiful business cards, and magnetic signs with my company's name that I use on the sides of my car."

Fletcher's strategy has been to keep reinvesting her profits to help her business grow. Today, she owns more than $16,000 worth of equipment and a few thousand dollars more in inventory.

Vic & Suzette Brounsuzian, Meg-A-Nut Inc.

"I went to different banks and asked them for a small-business loan. Naturally, some banks turned me down, but there was one that thought I had a great business idea and decided to take a chance," says Vic Brounsuzian, 44, who opened a small shop in Stream-wood, Illinois, selling dry-roasted nuts and fine candies with his wife, Suzette, in the fall of 1995.

Although many entrepreneurs find banks to be unresponsive in meeting their loan needs, it was helpful that the Brounsuzians had already prepared a solid business plan with direction from the Small Business Administration.

"Banks expect you to have some sort of collateral," Vic explains. "It helped that I have the house my family lives in and a condo I purchased years ago. Before approving my application, the bank had the house and condo appraised, and I was asked to provide complete information about my other assets and personal funds. I supplied information about my cars, retirement funds from my previous job, personal mutual funds, and personal savings. They also checked into my overall level of debt, such as the amount of money still owed on my home mortgage."

The loan was approved, but with one condition: The Brounsuzians had to first invest one-third of the amount of their loan before they could obtain any of the loan's bulk sum. "We dipped into our own personal savings and we cashed in our mutual funds," Vic states. "We've put everything we've got into this business."

Next month: Our entrepreneurs will be back to share the tenth step to start-up: pricing your offerings.


A business writer for the past eight years, Kylo-Patrick Hart has run a successful homebased consulting business since 1989.

Capital Ideas

Perhaps the most important thing to remember about start-up capital is that it doesn't all have to come from a single source. Successful entrepreneurs often tap a variety of financial sources to help make their dreams come true. These include:


  • Current salary. Squirrelling away portions of your paycheck today can help fund your own business tomorrow. If you're already past the planning stage and are ready to launch your new venture, consider moonlighting, or cutting back your full-time job to part-time to ensure you'll have some steady funds rolling in until your business begins to soar.


  • Friends and relatives. Think about borrowing the start-up funds you need from close friends and loved ones. If you do, be sure to put everything (interest, terms of repayment, penalties) in writing to avoid damaging personal relationships, in case something inadvertently goes wrong. Borrowing money from people you know typically results in lower (or no) interest rates.


  • Bank loans. Entrepreneurs typically find banks reluctant to finance start-up ventures. The key to obtaining small-business bank loans frequently involves getting the loan guaranteed by the Small Business Administration (SBA), which assures the bank making the loan that it will ultimately be repaid. You should be aware, however, that the SBA is more likely to guarantee a loan for someone who has been in business awhile than for someone just starting out.


  • Home equity loans. The key to obtaining a home equity loan, clearly, is actually owning a home of your own so you can borrow money on the part of the mortgage that you have already paid off. The bank will either provide a lump-sum loan payment to you or extend a line of credit based on the equity in your home.


  • Retirement funds. If you've got money stored up in a retirement savings plan offered by your employer, you may be able to get your hands on some of it in the form of a loan. Consult the plan's documentation to see if this is an option. If it is, you'll likely be allowed to borrow up to half of the amount you have in the plan.


  • Credit cards. Because of the high interest rates (often 18 percent or more) associated with them, credit cards are not an ideal source of start-up capital in all situations. But if you need to get your hands on some instant cash for equipment or inventory, and expect fairly immediate financial returns so you can pay off their balances quickly, credit cards can turn out to be quite handy in moments of need.

Contact Sources

Let's Go Party LLC, 4531 Manorview Rd., Baltimore, MD 21229, (410) 624-0584.

Meg-A-Nut Inc., 1574 Buttitta Dr., Streamwood, IL 60107, (630) 837-2551.

Proudfoot Wearable Art, 1402 Bridgeport Ln., Alexandria, MN 56308, (320) 763-4904.