While most entrepreneurs fund their own companies, some businesses need cash upfront to get off the ground. If you're a first-time entrepreneur, finding cash will be challenging, but there are creative ways to fund your startup.
Experts don't recommend borrowing money out of your house or using your credit cards. Borrowing from family is dicey, too.
If your business involves selling goods, you may be able to get a loan from your creditors in the form of extended terms, says Jonathan Freedberg of business lender Aberdeen Funding. Where vendors may initially demand cash upfront from a new business, perhaps they'd accept net 70 days instead. That gives you enough time to sell the goods and pay the vendor back with your customers' cash. "They might see an opportunity to expand their business," he says.
If you're opening a service business, get clients to pay part of their fee upfront, Freedberg advises. If you're providing a regular monthly service, make the first month's payment due in advance.
Otherwise, you'll need a stellar business plan to make your case to lenders, either individuals or institutions. If you're trying angel investors, realize that they'll want an ownership stake in the business and expect a substantial return on their investment soon, usually within three to five years. "You have to really say how your investors will make money," says business plan guru Tim Berry.
Whether you're pitching banks or angels, explain your concept in plain English, says Donald F. Kuratko, the Jack M. Gill entrepreneurship chair at the Johnson Center for Entrepreneurship & Innovation at Indiana University. Industry jargon discourages investors.
Funders will try to poke holes in your idea, so have the research ready to back up your business plan. "They'll ask, 'Have you actually talked to anybody who would really use your product?'" Kuratko says. "You don't want to answer 'no.'"
Kyle Rolfing took that advice to heart when he started employee-benefits service company RedBrick Health in Minneapolis in 2006. Before launch, Rolfing, 41, and RedBrick Health's five other co-founders (Kristin Austrum, 34, Kurt Cegielski, 36, David Dickey, 39, Abir Sen, 33, and Pat Sukhum, 34) interviewed more than two dozen large employers, RedBrick Health's target audience.
When it came time to pitch lenders, the RedBrick Health team had demonstrated interest from these employers, several of whom signed on as clients. RedBrick Health raised $15 million from VC firms, including Highland Capital and Versant Ventures. Rolfing says sales for 2008 are projected to be well in excess of $1 million.
One of the most common methods of obtaining small-business capital is through a bank loan guaranteed by the SBA. If you don't have good bank relationships, ask a well-off friend or relative to make introductions.
SBA director of loan programs Jim Hammersley says the agency has two programs geared toward startups: the general business guarantee program known as a 7(a) loan, and the 504 program, which offers loans for real estate and heavy equipment.
Speed up the loan process by presenting a well-documented business plan, including information on collateral your business could pledge against the loan. And don't think you can't get a bank loan as a newbie entrepreneur. Hammersley says 35 percent of the 7(a) loans the SBA guaranteed in 2007 were to first-timers, as were 18 percent of the 504 program loans.