From the October 1997 issue of Startups

Money isn't everything, but you can't get started without it. Once you know how much money you'll actually need, there are plenty of places you can turn. In fact, you may already have access to the only sources you need.

"While a homebased business requires less start-up capital than a traditional office, remember that you still need money to start your business and support ongoing expenses, such as an extra phone line, stationery, advertising and inventory," says Alona Sussman, a certified financial planner in Chicago. Sussman suggests acquiring at least six months' worth of working capital before starting your business. "This financial cushion will help you survive the time from when you open your doors to when your first revenue check arrives."


Plan Ahead

By planning ahead and considering your financial options, you can determine which sources will help you build your business and ensure your future success. Use the following tips to find the financing that will help you build and grow your homebased business:

  • Create a business plan to determine how much money you need. Setting up a business plan helps you figure out which financial resources will meet your needs, Sussman says, and impresses upon potential lenders that you're serious about the venture. "If you need $1,000 to buy a computer, you will choose different sources than if you need $50,000 to buy a franchise," she says. A credit card, for example, could provide the cash you need for a computer, but it wouldn't help you come up with a franchise fee. A home-equity loan, on the other hand, would be overkill if all you need is a few hundred dollars to print marketing materials.
  • Conserve your available funds to make the most of the money you have. As a seasoned homebased-business owner, Chuck Randa has found that conserving financial resources is another way to generate funds for his business. For 18 years, Randa has owned and operated Whiteface Chalet, a Swiss-style inn in Wilmington, New York. By doing all his banking with the institution that holds his mortgage, and by negotiating with a small-business specialist at the bank, Randa has been able to negotiate for specialized services that are tailored to his business's financial situation. "The bank allows us to skip a mortgage payment in our two slowest months, May and June," he says. In exchange, Randa agreed to a longer term for his loan. "And when we explained our business to the bank, they also offered us a free checking account and a safe deposit box, saving us even more money."

During the first two years of operation, Randa paid an accountant $7,000 to complete a monthly financial report for him. He saved money the next two years by learning to compile his own reports. "My computer cost $2,200, but I saved $3,000 the first year and $4,000 the second year as I continued to learn the accounting tasks."

  • Pool your resources. Assembling a variety of financing sources can help you build your credibility as a viable business, which also increases your likelihood of receiving financial help from additional sources, according to Claudette Hayle, president of The Hayle Group, a New York City financial and management consulting firm that specializes in helping small businesses obtain capital. "Many financial sources don't want to be the sole lender," Hayle says. "You are much better off if you're able to acquire seed capital through friends, family or other sources rather than going to a bank as a business owner with no capital. If the bank sees that you've already acquired some funding, they often feel that you have an investment to protect. A bank that may not be as inclined to lend you the full $100,000 you need could give your package a more serious look if you come up with the first $40,000."

At Your Fingertips

Here are some sources of quick money already at your disposal:

  • Use your credit card for a short-term loan. Scott M. Kahan, a certified financial planner and president of Financial Asset Management Corp. in New York City, purchased a $3,300 laptop computer for his business two years ago by charging it on a credit card. Because the credit card offered zero-interest financing for the first six months and 6.9-percent interest for the next six months, Kahan was able to take a year to pay off the purchase. If the debt had lasted longer, Kahan would have transferred the balance to another credit card rather than incurring a higher interest rate. "Assuming you have a good credit history, you'll constantly receive offers for low-interest credit cards in the mail," Kahan says. "By looking at these to determine the best offer, you'll discover that using low-interest credit cards can be the cheapest financing you'll ever see."

He warns, though, that while "credit card loans" begin as accessible, low-interest funding, their introductory interest rates often rise as high as 15 percent to 18 percent within six months. "Often, the bank will lower the introductory rate over the phone, either by extending it or by allowing you to transfer your existing balance to a different account--possibly a gold or platinum account--where the rate is lower." Sometimes transferring from one account to another and then back to the first will help you keep the lower interest rate.

  • Borrow from a 401(k) or a company pension plan. If you're starting your homebased business to provide a second income, consider borrowing against your 401(k) or company pension plan. "It's very common for such plans to allow you to borrow a percentage of your money that doesn't exceed $50,000," says Vickie Hampton, a certified financial planner in Austin, Texas. "The interest rate is usually about 6 percent with a specified repayment schedule. The downside of borrowing from your 401(k) is that, if you lose your job, the loan has to be repaid in a short period of time--often 30 days."
  • Use the funds in your individual retirement account (IRA). Within the laws governing IRAs, you can actually withdraw money from an IRA as long as you replace it within 60 days. "This is not a loan, so you don't pay interest," Hampton says. "This is a withdrawal that you're allowed to keep for 60 days." She says it would be possible for a highly organized entrepreneur to juggle funds among several IRAs. "But if you're one day late--for any reason--you'll be hit with a 10-percent premature-withdrawal fee, and the money you haven't returned becomes taxable."
  • Use your other investments as a resource. Another way to squeeze start-up cash out of your investments is to take a loan against your stocks and securities. Low-interest margin loans against stocks and securities can be arranged through your brokerage accounts.

"The downside here is that, if the market should fall and your securities are your loan collateral, you'll get a margin call from your broker, requesting you to supply more collateral," Hampton says. "If you can't do that within a certain time, you'll be asked to sell some of your securities to shore up the collateral."

  • Use a home-equity loan as a cash source. A home-equity loan has many positive aspects as a potential cash source, Hampton says. Home-equity loans carry relatively low interest rates, and all interest paid on a loan of up to $100,000 is tax-deductible. But be sure you can repay the loan--you can lose your home if you don't. "Depending on the value of your home, a home-equity loan could become a substantial line of credit," Hampton says. "If you have $50,000 in equity, you could possibly set up a line of credit of up to $40,000. The only drawback is that your house is put up as security, and you can lose your home if the equity is not repaid." Borrowing against home equity is now allowed in all states except Texas.
  • Borrow against cash-value life insurance. Hampton says you can use the value built up in a cash-value life-insurance policy as a ready source of cash. The interest rates are reasonable, because the insurance companies always get their money back. You don't even have to make payments if you don't want to. Neither the amount you borrow nor the interest that accrues has to be repaid. "The only loss is that, if you die and the debt hasn't been repaid," Hampton explains, "that money is deducted from the amount your beneficiary will receive."

Outside Sources

Here are some sources you might have overlooked:

  • Borrow from friends and family. "If you're married and your spouse has a good job, your spouse's income could bankroll your business so you won't have to seek any other source," Sussman says. "This can be the best financial solution, because you don't have to qualify, the interest rate is low or non-existent and your spouse probably won't penalize you for late payment."

Borrowing from friends and family is another viable option, particularly if you're unable to qualify for other types of financing. "I advise clients to hire an attorney to formalize and legalize such loans rather than accepting a handshake to seal the agreement," Sussman says. The legal document should specify who the responsible parties are, indicate a repayment schedule and note any extenuating circumstances. For example, a client of Sussman's lent money to his sister. A clause in their contract states that, if the sister sells her home, the loan must be repaid immediately.

  • Apply for a grant. Depending on the type of business you start, you may qualify for a grant. Grants may sound appealing because they offer a lump sum of money and usually require no payback or have lengthy payback schedules. But they are difficult to find and difficult to qualify for. "As cushy as they sound, grants are the hardest kind of money to get," Sussman says. "They're highly competitive, and you have to answer many questions to prove the validity of your business. Also, the application process is long."

When Hayle put together the financing package for the Long Island restaurant Naisiki International, she knew the restaurant would offer 40 new jobs to an economically deprived area. She was able to acquire a $500,000 loan from the Urban Development Corp. in New York City. She also persuaded the town of Hempstead, New York, where the restaurant would be located, to contribute a $200,000 grant.

While not many grants are available to start-up companies, Hayle says, community development grants are worth a look. "If you feel like your future business could contribute to community development or empower a group of economically deprived people, visit your state economic development office to find out which provisions are available," she says. "Be aware of the grant cycle; organizations take in proposals and review them annually or biannually." With grants as well as loans, Hayle says that, if you have already acquired some funding, you are more likely to receive serious consideration and, ultimately, the funding you're seeking.

Keep It Official

Borrowing money from family and friends can be tricky business. To ensure that your friendly relationships stay that way, treat such loans as professionally as you would a loan from any other source, advises Randall Mackey, president of Mackey, Price and Williams, a corporate and securities law firm in Salt Lake City. Either draft and sign a written agreement yourself or ask an attorney to draw up a contract for you.

Mackey recommends that basic terms of the contract include the amount of money to be borrowed, the date when it should be paid pack, whether payments should be made in installments or with a lump sum--or even repaid on demand.

The best way to avoid problems is to discuss with your friend or relative what each of you expects from the transaction. If you don't want them involved in your business, make it clear in the beginning--and get your terms in writing. If he or she needs more reassurance that the money is being well-spent, agree to furnish a business plan or to provide "progress reports" at agreed-upon dates. Whatever your arrangement, putting it on paper will reassure you both that you have the control you need over your investments.

Worth Reading

Government Giveaways for Entrepreneurs, by Matthew Lesko (Information U.S.A., $37.95, 301-924-0556). This book lists grants and other government funding sources and tells you how to apply for them.

Getting the Money You Need, by Gibson Heath (Irwin Professional Publishing, $35, 800-634-3966). This book offers solutions and advice for finding the money you need to turn your business idea into reality.

Money Talk

The National Federation of Independent Business (NFIB) in Washington, DC, a small-business lobbying organization, offers a free booklet called "Small Business Financial Resource Guide." Its Web site (http://www.nfibonline.com ) includes helpful information for acquiring capital and contact information for NFIB state offices. For more information, call (800) NFIB-NOW, or write to 600 Maryland Ave. S.W., #700, Washington, DC 20024.

Carolyn Campbell, a home-office entrepreneur for 20 years, has written more than 200 magazine articles.

Contact Sources

Financial Asset Management Corp., 220 Fifth Ave., 13th Fl., New York, NY 10001, (212) 679-8200

University of Texas, Department of Human Ecology, GEA 117, Austin, TX 78712, (512) 471-5808

Whiteface Chalet, P.O. Box 89, Wilmington, NY 12997, (518) 946-2207