Getting a business out of the starting blocks can be daunting for a first-time entrepreneur. From choosing a location to hiring your first employee, the list of important considerations seems endless. But unless you're independently wealthy, one looming thought will override all the others: Where am I going to find the money?

Billions of dollars are available to businesses-start-ups included-from a variety of lenders and investors nationwide. You've got to be diligent and you've got to be flexible. But entrepreneurs committed to getting their businesses off the ground will find the necessary financing, experts contend, if they investigate and are open to all options.

In this high-tech age, those options are broader than ever. The Internet alone provides access to funding through venture capitalists, finance companies, banks, brokers, angel investors and mortgage firms. Then there are insurance companies, leasing companies, the Small Business Administration (SBA), community development agencies, franchisors (for those buying franchises) and more. Before surfing the Web or plunging into unknown waters, however, entrepreneurs should look closer to home.

Inside Sources

"Internal funds are by far the most important source for a start-up," says finance and economics professor Glenn Hubbard of Columbia Business School in New York City. Indeed, business owners often use personal savings, liquidated investments, pension funds and even consumer loans.

Consumer loans are generally secured by using assets as collateral, and homes are perhaps the most common assets used by start-up entrepreneurs. Putting up your home for collateral allows you to refinance an existing mortgage (perhaps at a better rate than you're currently paying), get a second mortgage or secure a home equity loan or line of credit. Be reminded, however, you may lose your home if your business fails and you default on the loan. As an option, consider pledging other assets as collateral, such as real estate, life insurance policies, business equipment and furnishings.

Other inside funding sources available to entrepreneurs include family, friends and business associates. Usually private and informal in nature, loans from sources close to you feature favorable terms without the need to pledge assets. On the other hand, such loans can lead to problems which may threaten long-term personal relationships and even your business. To avoid these problems, put all loan arrangements in writing-no matter how close you and your benefactor are. Don't forget to draft a formal agreement that stipulates all terms, clearly indicating that the money is a loan and doesn't impart any control or ownership of the business.

Touched By an Angel

Once your personal resources are tapped out, it's time to start the arduous task of finding outside funding. Your search for capital will depend on what type of business you want to start and how far along you are in the start-up process. "You can borrow if your business involves assets such as equipment or inventory," says Hubbard. "If you've only got an idea, a bank probably won't lend you money." Neither will venture capitalists, he adds. "They typically come in later, when a business is reaching its next growth phase. [Without assets,] you're more likely to attract an angel."

Angels are private investors who, for a myriad of reasons, seek out new businesses in which to invest. They can be an excellent source of funds if you're willing to offer returns in the neighborhood of 25 percent. "Typically," says Hubbard, "angels invest locally so they can check on the business and learn about the entrepreneur."

While Richard Quis of PriceWaterhouseCoopers LLP in Los Angeles feels angels are more myth than reality, he nevertheless acknowledges, "They can work if they're in the industry you want to enter." For example, if you were interested in starting an e-commerce business, you might seek out an angel who made a fortune by selling baby products over the Web. A successful search could yield experienced guidance as well as funding for your start-up.

"Angels could also be devils in disguise," warns Quis, a former investment banker. "Many entrepreneurs have had their ideas stolen by angels. It's hard to protect yourself from someone who's already established and has the resources to make your idea happen in a matter of weeks."

Unfortunately, there's no concrete way to protect yourself from angel imposters even the most informal meetings and initial contracts require a certain amount of idea-sharing. If you do decide to take the chance and strike a deal with an angel investor, always proceed with caution.

Henry J. Evans, decided to take that chance when starting his printing business. In 1991, the 23-year-old Santa Fe, New Mexico, entrepreneur had developed an array of specialized services for the healthcare industry, but was unable to secure a loan from banks, loan companies, family or friends to get the business off the ground.

Fortunately, his innovative proposal so impressed one prospect-the manager of a radiology center-that Evans scored a sale and won an angel at the same time. "He recognized that I had created a new business concept for a vast market," says Evans, whose company develops and distributes printing materials nationally.

Unbeknownst to Evans, his new client had financed several high-risk ventures and was looking to invest in a sound start-up. The young entrepreneur presented his angel with a business plan and asked for $50,000 to cover start-up expenses, in return for a 25 percent stake in the business. "He agreed to provide both financing and business counseling; I would contribute my concept and do all the work," says Evans. "If the business failed, I'd owe him nothing."

This year, Evans predicts Advantage Printing Specialists Corp.'ssales will hit the $6 million mark. The company's success permitted him to repurchase the 25 percent interest from the angel in 1994. "He made a heavenly profit on his $50,000 investment," reports Evans, who's been the company's sole owner ever since.

Banking On It

The thought of walking into a big bank with a business plan and facing a stern banker who does millions of dollars in deals each day can strike fear into the hearts of even the most determined entrepreneurs. For many start-ups, these fears are often well-founded.

Some bigger banks, like Bank of America and Bank One, say they'll lend to start-ups if the loans are backed by assets or an SBA guarantee. But because new businesses present a large, unknown risk to lenders, most major banks resist making conventional start-up loans without significant owner investment and marketable collateral.

Not so for smaller community banks. "I love doing start-ups," says Debra Lins, president and CEO of Community Business Bank in Sauk City, Wisconsin.

Lins acknowledges there are more uncertainties and risks involved with start-ups than with existing businesses; consequently, due diligence becomes more important. "Banks can't credit-score a start-up," Lins notes. "I look for passion and enthusiasm; [these qualities] will drive the entrepreneur." Beyond that, Lins' $25 million bank considers the borrower's credit history, background, business experience and personal investment in the business.

An entrepreneur herself-she put a business plan together and raised capital to start Community Business Bank in 1994-Lins, 40, actively encourages new-business loans. "They're fun for me, and many bankers out there agree," she says.

Jim Davis certainly does. "If an entrepreneur comes in and convinces us he or she has a sound business concept, we'll help that person write a business plan, put the funding together and even help with their cash flow," says the president and CEO of National Business Bank in Torrance, California. "Those are some of the services a small community bank can provide."

Davis' locally owned, independent bank, with $5.3 million in capital and $4.5 million in deposits, writes conventional start-up loans for up to $75,000 "without batting an eye" and also funds new businesses with SBA-backed loans.

Looking to Uncle Sam

SBA loans are often the final push start-ups need to open their doors. In fiscal year 1998, nearly $11 billion in long-term credit and other financial assistance was provided to more than 49,000 small businesses through the SBA's network of participating banks, nonbank lenders, certified development companies and SBA-licensed companies.

The SBA itself doesn't make loans. Rather, it offers private lenders a guarantee on loans made to qualified small businesses. If the borrower fails to repay the loan, the lender can usually obtain 75 to 80 percent of the outstanding loan principal from the SBA. Of interest to entrepreneurs seeking start-up financing are the following programs:

  • Microloans. Small businesses needing up to $25,000 in start-up or expansion funds may obtain short-term (up to six years) microloans through nonprofit groups, such as local economic development organizations or state finance authorities approved by the SBA. Loans are handled much like a line of credit and are used to buy machinery, equipment, furniture, fixtures, inventory, supplies and provide working capital. Funds are intended to be dispersed with close monitoring of the recipient. A self-employment training program may accompany the loan.
  • Low Doc. This program, which features minimal documentation and quick response time, expedites the processing of loans of up to $150,000. Terms are set by the private lender. About 90 percent of applicants are approved, usually in three days.
  • High Doc. For loans in excess of $100,000, Section 7(a) provides for loan guarantees of up to $750,000 or 75 percent of the loan amount, whichever is less. Response time ranges from a week to several months. Loans may be used to start a new business or to assist in the operation, acquisition or expansion of an existing business. High Doc loans are often used to cover the costs of working capital; the purchase of inventory, machinery and equipment; and the construction, expansion and rehabilitation of business property.

Other loan programs apply to small, disadvantaged companies. For further information on SBA loan programs or to find the SBA office nearest you, call (800) 8-ASK-SBA.

A Loan at Last

Greg Brophy's business idea was so surefire, he couldn't contain himself. Sure, it would cost $125,000 to get started. But with clients lined up and projected sales in the millions, he saw no roadblocks to getting a loan. Until he reached the bank. "They gave me a firm 'no,'" he laments. Being the eager entrepreneurial sort, he looked to other sources.

Two months later, Brophy asked for an expansion loan. "Are you insane?" the bank manager asked. "Wait at least six months, build equity and then we'll talk additional funding." Brophy didn't have time to wait. At 26, he was impelled by the immediate success of his brainstorm: Shred-It, a mobile shredding service for businesses.

"I needed trucks, equipment and staff to service our growth," he says. "I borrowed $17,000 from my family, maxed out two credit cards and leased a second truck." While the bank agreed to a $15,000 line of credit, they weren't as accommodating six months later when Brophy asked for more money. "No," said bank officials, "and if you order another truck, we'll call your loan." Rejected, he left the bank and immediately ordered another truck.

So the bank called his loan. Brophy had to repay everything within 60 days. "I showed four other banks my financial statements, sales growth and projections," he says. "One gave me more money than I asked for."

With financing challenges behind him, Brophy went on to build Shred-It America Inc. into a network of more than 70 company-owned and franchised offices in nine countries, with system-wide revenues of $97 million in 1998.

If you're seeking a loan, Brophy suggests you prepare a thorough business plan and show fervent belief in your concept. "They're evaluating your commitment. Believe in yourself, and you can convince a bank to believe in you."

In the Bank

Because most franchise systems have proven track records, would-be franchisees usually have less difficulty securing start-up financing. Such sources include leasing companies, loan brokers and banks.

Before applying for a loan, however, ask the franchisor for financial support, advises Howard Bassuk, president of the Franchise Network in San Diego. The veteran franchise broker says franchisors have a vested interest in providing beneficial buyers' terms.

Case in point: Carpet-cleaning franchise Chem-Dryrequires franchisees to pay one-third of total start-up costs; the company carries the balance ($12,700) interest free for five years. Keith Gerson of Logan, Utah-based Harris Research Inc., which franchises Chem-Dry, says franchisees don't have to begin making payments until they've been in business four months. Gerson notes most Chem Dry franchisees raise their one-third ($6,350) from savings, family or friends; an SBA loan; or by using their credit cards.


Paul DeCeglie is currently working on his second book about high-finances. The former staff reporter for Journal of Commerce and American Banker can be reached at MrWritePDC@aol.com