Week 6: Raising Money FAQs
Are friends and family a good source of funding?
Getting financing from friends and family is often the only choice for new business owners who can't find funding from outside investors. Friends and family are more willing to invest in you because they love you, and less likely to scrutinize every comma and semicolon in your business plan--or to demand a high return on their investment.
However, raising money from friends and family creates personal and emotional issues that go beyond business judgment. For tips on how to approach this delicate topic and protect your relationship with your loved ones, read this article on " How to Make the Kitchen Table Pitch ."
- Character: How have you managed other loans (business and personal)? What's your business experience? If you're a corporate executive and want to open a restaurant, you better have restaurant experience.
- Credit capacity: The bank will conduct a full credit analysis, including a detailed review of financial statements and personal finances to assess your ability to repay.
- Collateral: The primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing.
- Capital: What assets do you own that can be quickly turned into cash if necessary? The bank wants to know what you own outside of the business--bonds, stocks, real estate--that might be an alternate repayment source. If there's a loss, your assets are tapped first, not the bank's. Or, as one astute businessman puts it, "Banks like to lend to people who already have money." You'll most likely have to add a personal guarantee to all of that, too.
- Comfort/confidence with the business plan: How accurate are the revenue and expense projections? Expect the bank to make a detailed judgment. What's the condition of the economy and the industry--are you selling buggy whips or computers
Whether you're looking for startup financing or need assistance with an existing business, the Small Business Administration has a loan program for you. SBA loans vary greatly, depending on what type of business owner you are and what you intend to use the money for, but what's crucial to understand is that the SBA only guarantees the loans. You still must get the loan through a bank, credit union or nonprofit financial intermediary to access their guaranteed-loan programs. An in-depth review of the top three SBA loan programs can be found by reading this article on " SBA Loans for Your Startup ". For information on other types of SBA loans, visit their website at www.sba.gov .
Should I use my credit card to fund my business?
Experts advise using credit card financing as a last resort because interest rates are higher than any other type of financing. However, if you are good at juggling payments, your startup needs are low, and you're confident you'll be able to pay the money back fairly quickly, this could be the route to take. Some entrepreneurs take advantage of low-interest credit card offers they receive in the mail, transferring balances from one card to another as soon as interest rates rise (typically after six months). If you use this strategy, keep a close eye on when the rate will increase. Sometimes you can get the bank to extend the low introductory rate over the phone.
Are there grants available to help me fund a new business?
Government money is just one of the many sources of funding available to startups. Find out how you can find grant money for your business by reading " Free Money? "
What's an angel investor?
An angel investor is someone who invests in a business venture by providing capital for startup or expansion. Angel investors usually seek a higher rate of return than more traditional investors, and can play an active role in the management of the company.
For tips on meeting with angel investors, read this article on " The Fine Art of Meeting With an Angel Investor ."
Can I get venture capital?
Getting venture capital isn't easy, but it can be done. You'll have to give up equity, but when you're a high-growth company with high-financing needs, it can be your best bet. Find out how to impress venture capitalists with this straight-shooting advice on pitching potential investors , and then read this article on how three unlikely businesses found venture capital funding of their own.