How To: Finance Your Business

Joanne Amos borrowed money from her dad. Mike Leavitt took a second mortgage on his home. Harold Ford used personal savings and a loan guaranteed by the U.S. Small Business Administration (SBA).

These three, like millions of Americans in the '90s, went into business for themselves. One of their first hurdles was how to find the money to start or buy that business.

If you've already embarked on this search, you know no one is standing on the street corner or at the bank teller's window eager to hand you a fistful of cash to launch your entrepreneurial dream. But here are six financial sources to pursue in your hunt for startup capital.

1. Savings and family. The hard truth is, most people must tap their own funds to start a business. Three-fourths of startups got at least some capital from their owners' pockets in 1996. Banks were the second most common source, but that included second mortgages and home equity credit.

Amos worked for a photography company while in college, intending to open a branch at another campus after graduation.

"When I asked my father for a loan, he said, 'Why not borrow a little more and do it for yourself?'" says Amos of her launch of Reflections Photography Inc., an event photography business now located in Washington, DC.

Likewise, Sal Risalvato's father put up his home as collateral for a loan so his son could buy a Texaco service station in Riverdale, New Jersey.

Leavitt didn't turn to relatives. He got part of the money to buy Computer Clearance Center, a used- and custom-computer dealer in Boise, Idaho, by taking a second mortgage on his home. The previous owner agreed to accept monthly payments for the rest of the purchase price.

2. The SBA. The agency has several loan programs for small businesses. The largest is the 7(a) loan guarantee program, which loaned almost $9.4 billion to U.S. businesses last year.

Ford qualified for an SBA-guaranteed loan to buy Postal Copy Center in Meridian, Idaho. "I had the assets to finance the startup myself," Ford says. "But I decided to finance part of it because once your savings are gone, they're gone."

Two misconceptions about SBA loan programs are that the federal government is the lender and the lending criteria are more lax than for other commercial loans. In actuality, the SBA merely guarantees a portion of the loans as an incentive so commercial lenders will make more small-business loans. The borrower must still meet the lending institution's requirements for collateral, experience and the like. (Contact your local SBA office for a list of participating lenders in your area.)

Most lenders require the borrower to put up 30 percent of the project's value in the form of cash, home equity or stocks.

"The equity required will be higher for a start-up," says Lawrence Rouse, owner of Associated Enterprises Ltd., a management consulting firm in Lakewood, Colorado, who helps start-ups obtain financing. "You need to know how to structure the business to make it attractive. It takes money and management. If you have no idea how to manage a business, bring in someone who does."

3. Incubators. Many communities have established business incubators to help startups find low-cost space, management training and technical assistance.

"Most incubator managers offer some kind of financing assistance," says Susie McKinnon, director of member services at the National Business Incubation Association (NBIA) in Athens, Ohio. "This can range from hooking them up with a network of local angel investors to making loans from a seed fund that belongs to the incubator itself."

For a list of incubators in your state, send a self-addressed, stamped envelope to the NBIA, 20 E. Circle Dr., #190, Athens, OH 45701, or visit the group's Web site.

4. Online matching. The Internet has become a popular place to search for investors. One resource available on the Web is the Angel Capital Electronic Network (ACE-Net), developed by the SBA's Office of Advocacy, the Securities and Exchange Commission, state securities regulators, and the North American Securities Administrators' Association. Qualified investors and entrepreneurs obtain passwords to access ACE-Net through regional network operators. The Center for Venture Research at the University of New Hampshire operates the site.

"[ACE-Net] will rapidly become the most visited meeting place for accredited investors and entrepreneurs seeking funding," says Bard Salmon, chairman of the Technology Capital Network at the Massachusetts Institute of Technology in Cambridge, a regional network operator.

5. Private placements. With a strong business plan, Joe Kunkel attracted 12 private investors who put $570,000 into Wholesome Kidfoods Inc., the Oak Park, Illinois, maker of Fruit WOWnies, a healthy snack. "We sent letters to at least 150 people we knew who could invest $25,000," Kunkel says. "We wanted investors who knew what they were doing." Professionally prepared documents and Kunkel's consulting background helped sell the deal, he says. "We had to put in our own savings, too; that was part of our pitch. We also agreed not to draw a salary until the company made money."

6. Corporate partnering. A startup with new technology may be able to find a corporate partner or form a strategic alliance with a large, established company. Large corporations may offer money or access to a distribution network in exchange for licensing rights to new products.

Daunt recommends you look for corporate partners that don't directly compete with you but are familiar with your technology. Both companies should have compatible objectives and corporate cultures.

Where Startup Funding Comes From

Business owners obtained at least a portion of the money for starting their businesses from the following sources:

Personal savings 72%

Banks 45%

Friends/relatives 28%

Individual investors (not friends or relatives) 10%

Government-guaranteed loans 7%

Venture capital firms 1%

Banking Big on Small-Business Loans

Some banks are more committed to making small-business loans than others. Here are the top five bank holding companies in the nation making small loans for 1996. For a complete list, or to find out which banks in your state are making the most loans to small businesses, visit the Small Business Administration's (SBA) Web site

Bank Amount (in billions), Number of Loans

Keybank National Assn. $3.8, 74,542
Wells Fargo Bank $3.4, 217,399
NationsBank $3.1, 120,480
Bank One $3.0, 86,012
First Union National Bank $2.9, 66,057

is a freelance writer who specializes in small-business issues.