From the April 2002 issue of Startups

(YoungBiz.com) - Did you ever hear the saying "It takes money to make money"? It's true. Starting your own business takes cash--and that can be a problem if you don't have any. But if you're serious about starting a business, there are ways to raise those start-up funds.

Look for Equity Investors
James Carpenter had a dream to start his own dance business. Getting started was low-cost enough for the Louisville, Colorado, 'trep, who gave private lessons for would-be cheerleaders preparing for tryouts.

But as his business grew, 16-year-old Carpenter began to envision other possibilities, like opening his own studio and offering summer camps for cheerleading and athletic dance. "We needed studio space," he explains. "Then I had to pay for instructors, their uniforms, food for camp, supplies, and fliers and brochures."

Carpenter needed money to jump-start this facet of his business. He turned to his parents, who were able to invest $3,000.

Carpenter's parents are what are known as equity investors. Equity investors become part owners in your business and share its risks and its potential financial success. Relatives or close friends who are willing to invest in you and your dream are one place to look for start-up cash.

Get a Community Development Loan
You could also borrow the money from a lender--either a bank or organization, or privately, through a family member or friend. While it's indeed possible for 'treps to get loans, it can be challenging. Keep in mind, too, when you take a loan, you are incurring debt for your business that must be paid back--with interest.

Look for organizations that offer start-up cash for young entrepreneurs. Dan Villa, the 17-year-old owner of Pintlar Delivery Service in Anaconda, Montana, was able to secure funding for his business through the Anaconda Local Development Corporation (ALDC). "The ALDC contacted the teacher in charge of the School-to-Work program and said they were willing to give a loan for a youth business," he says. "They narrowed the choices down to about five students, and I was the only one who was really serious about starting a business."

The organization's only condition for the loan was approval of the business idea. In order to determine the loan amount, Villa provided the ALDC with an estimate of his start-up and operating costs.

Get a Bank Loan
Drew Sponheim, owner of Tenderlean Meats in St. Ansgar, Iowa, went the traditional route: a bank loan. The fact that Drew has always had a bank savings account and that he is from a small town made it a bit easier. Still, he was nervous when he went to see a loan officer to borrow $16,000 to expand his business. "St. Ansgar is a small town of 2,000 people, so the banker knew my dad and knew about our family farm," recalls Sponheim, now 17, "but it was still scary!"

After paying for feed, contract workers to help raise the hogs and other expenses, Sponheim ended the year with a $2,000 profit. That made it a little easier to go back the next year and get a $32,000 loan to expand his business further.

Both lenders and equity investors must be sold on the profit potential of your business before they will put up their money. Like these entrepreneurs, you will need to put together a detailed business plan to approach potential sources of debt financing (lenders) and equity financing (investors). (See our Introduction to Business Plans for more on writing a business plan.)

Raise the Cash Yourself
Of course, the most straightforward solution is to use your own savings or sell something you own to raise the cash you need. This works best for start-ups that don't require a lot of cash or for businesses that can start small.

Thirteen-year-old Casey Sharber's business, water gardening, fit the bill perfectly. Sharber's parents started the Sapulpa, Oklahoma, teen off several years ago by giving her water plants and gardening equipment as birthday and Christmas gifts. A short time later, her plants were growing so well that she wanted to expand. She raised the capital to do that by selling the livestock she'd raised in Future Farmers of America.

Whatever your business, how you will raise start-up and expansion capital should be part of your business plan. There are lots of resources out there, from family and friends who are willing to invest in your idea to organizations with special interests in young entrepreneurs. And don't forget to look to your greatest resource of all--yourself.

NEXT STEP
 
  • Learn about financial resources for young entrepreneurs in "Got Cash?"
  • Read more about James Carpenter's dance studio and cheerleading school on YoungBiz.com.
  • Visit YoungBiz.com and find out how Katie Glassman raised money to record a CD by going to a special bank for people under 21.