What About Me?

Determining Your Best Option

Baby, I Got Yo Money

Unlike venture capital firms, banks are not influenced by astronomical profit potential when evaluating a borrower's credit worthiness. Their first consideration is risk aversion; their second is the borrower's ability to cover the principle and pay the interest. Consequently, banks prefer that business owners secure loans with hard assets--a home, equipment, real estate. Some will lend against a small business's receivables and inventory but at steep discounts. Furthermore, most banks are reluctant to make loans to a business if the owner is not heavily invested.

Alan Fellheimer, president of Pennsylvania Business Bank in Philadelphia, gives start-up loans to almost any type of business, but only if the owner also makes a substantial investment. He encourages start-ups to approach banks, particularly his bank. "Many think they won't qualify for a bank loan, but we often can work with entrepreneurs to structure a deal that makes sense. Maybe a combination of [the owner's] assets, help from friends or family, someone who will guarantee the loan. As long as it's not an SBA loan--they require too much paperwork."

Most entrepreneurs now take advantage of the SBA's Low Doc program, not only because it reduces paperwork to one page, but also because it cuts response time. The streamlined program expedites the review process on loans under $100,000, relying heavily on the strength of the borrower's character and credit history, according to Mike Stamler of the SBA. Start-ups must submit comprehensive business plans with Low Doc applications; existing businesses should, but need not. A variety of SBA loans--including the 7(a) Loan Guaranty Program, are available through banks, business development agencies and other lenders for conventional start-ups, new franchises and existing businesses.

Considering turning to friends and family?
Check out Investor Next Door for the inside scoop.

Despite the popularity of government-backed loans, the overwhelming majority of start-up entrepreneurs rely on personal savings, residential mortgages, consumer and credit card loans, as well as money from people they know. When Greg Brophy started Shred-it Inc. in Mississauga, Ontario, in 1998, the then-26-year-old entrepreneur asked a dozen family members for money. "Most could only come up with four or five thousand each, but put together, it makes a difference," says Brophy, now 37. Still, it wasn't enough to get his shredding business ripping. Needing $125,000, Brophy refinanced his house and arranged equipment leasing.

If you decide to approach friends and family, Brophy warns, "recognize that it can be a double-edged sword: [you've got] low-cost financing but potential misunderstandings that could damage relationships and the business."

To reduce the likelihood of such problems, "keep it professional," advises Lori King, founder, president and CEO of private equity investment firm NVST.com Inc. in Bellevue, Washington. "Don't approach it as a 'trust me' situation just because it's family. Prepare a business plan, do all necessary research and present an honest picture of the risks and rewards."

No matter what you do, find a way to stand apart from the crowd when you approach investors. Do that, and you're bound to find the money you need--dotcom or not.

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This article was originally published in the June 2000 print edition of Entrepreneur with the headline: What About Me?.

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