Don't Bank On It
Seeking money to start your business? George Dawson, author of Borrowing to Build Your Business (Upstart Publishing, $16.95, 800-594-3943), has plenty of ideas. With 23 years as a banker under his belt, Dawson knows what bankers look for when making a loan. As owner of small-business finance consulting firm Growing Your Business, in San Antonio, he also knows where to go when banks say no.
Business Start-Ups: Where should an entrepreneur start looking for financing?
George Dawson: Financing a start-up is like a layer cake. The foundation layer is your money; the frosting is the bank loan. There are plenty of [financing sources] in between. Finding them requires persistence and a willingness to explore all the avenues.
BSU: How can you increase your chances of success?
Dawson: Successful bank borrowers have three things in common. First, a commitment of their own capital. [You should contribute] 30 percent of what's needed--whether in tools, equipment or cash. Second, extreme familiarity with their industries. Third, you need ample collateral, or your loan has to be SBA-guaranteed. The further you are from these ideal characteristics, the less likely you are to get bank financing.
BSU: Then where do you go?
Dawson: The next step is friends, family--people who have a noneconomic reason to help you. Some rules: Be sure they understand the risk and what you're promising in return; put this in writing. Pay them back as soon as you can.
Friends and family can also guarantee loans or pledge collateral on your behalf. You can pay them for that; it's a deductible business expense and a way to make the loan more businesslike.
The next step is finding microlenders in your community. In San Antonio alone, we have four programs that lend to different types of small businesses--and we're a small and poor city. Find out what exists in your town or state. It takes a lot of digging. One of the best sources is the SBA's Small Business Development Centers.
The third source is local businesses that invest in other local businesses. They're often called angel investors; I prefer the term affinity investor. That's someone who, when you tell them your business concept, immediately understands what you're doing. Affinity investors are suppliers to your industry, people who sell to your customer base, or even your customers.
Affinity investors are the hardest group to find. If you're in a big city, you can find them through investor clubs or venture capital clubs. If you live in a tiny town, there's probably only one person in town who does this, and everyone knows who he is. If you're somewhere in between, you have to go find them.
Dawson: I guarantee that, right now, you know someone who can lead you to someone [who could be an affinity investor]. Make a list of everyone you know and who they might know. Add everyone who is a supplier to your industry, sells to the same customers or is a customer. Look in the paper to see who's recently sold a company and made money; who's done an IPO; what chief executives have retired and might have money and time on their hands.
Then ask them for advice. "Here's my business plan; here's what I'm thinking about doing. What do you think?" Don't ask for money. If they like what they see, they'll volunteer it. If they don't, ask who they know that you might want to talk to.
BSU: What's the most important piece of advice you'd give someone seeking a loan?
Dawson: Have a good, well-researched business plan. That's not exciting, and it's not what people want to hear, but you have to think the whole thing through.
Growing Your Business, (800) 594-3943, firstname.lastname@example.org