For most people, one of the most challenging parts of starting a business is funding it. Chances are, you'll demonstrate some of your best creativity and perseverance as you assemble your start-up capital. But remember, you won't be the first--or the last--person to struggle with this issue. Take heart and ideas from successful business owners who've been where you are.
Have good credit. In 1993, Eric J. Ruff, 42, started PowerQuest Corp. in Orem, Utah, with a few thousand dollars in personal savings and a $50,000 consulting contract. But because it took the young software developer two years to get his first product out, those start-up resources didn't last long. With no product, and therefore no income to repay a loan, he wasn't a prime candidate to commercial lenders.
During those early years, Ruff used his family's personal credit ("I ran up more than $30,000 in debt on our credit cards," he recalls), held a couple of garage sales ("We didn't have much, but we had less when I was done"), sold their second car ("I started the business in the basement, so I didn't need a car to get to work") and took on odd jobs just to make a little money. When his personal assets were exhausted, he borrowed from employees and friends (paying 24 percent annual interest), and was able to get some loan money from a state resource designed to help unfundable companies. "I submitted more than 150 business plans to potential investors and a few lenders, and everybody [either] turned me down [or ignored me]," he recalls. Once the first product was almost ready to ship, he was able to get an SBA loan of $100,000.
Now investors are begging Ruff for a piece of the action--and it's his turn to say no (although he has used some venture capital to help grow the company). PowerQuest's first year revenue was $30,000, primarily from the consulting contract. By 1995, the company was at $1.8 million, and closed out 1999 at approximately $50.4 million.
"My wife and I always paid our bills on time," he says. "If we had not had such a good credit rating, I could not have gotten this business off the ground."
Know how much you need. When David Penn, 33, and his wife Robin, 40, decided to open a preschool in Orlando, Florida, they realized the first step in raising start-up capital was to figure out how much they needed. Penn did extensive market research and wrote a detailed business plan that clearly outlined their financial needs of $125,000. They had about $13,000 of their own, and rather than try just one resource for the remainder, they took more of a shotgun approach.
"We spread ourselves out," Penn says. "We didn't believe a bank would lend us money." He was happy to find out he was wrong--The Learning Center was approved for a $100,000 SBA loan. He also raised $12,000 in investments from friends and family.
What didn't work? Penn approached some large corporations for sponsorship funds, but was turned down by most because the preschool is for-profit, and he decided not to pursue others because the companies' structures made it too difficult. He also contacted a few celebrities known to advocate children's causes, but they declined to purchase a sponsorship or invest. He thinks the sponsorship approach could still work, and plans to use that strategy when he's ready to start raising expansion capital.
Penn believes his fundraising efforts were successful because he knew exactly how much he needed to start operations, and he could clearly demonstrate that to prospective lenders and investors. He worked closely with an accountant and other business advisors to develop a comprehensive financial, marketing and operations plan. "Do your research," he suggests. "Make sure you know how much money you really need."
Play to your strengths. Rebecca Kreamer Swartz, 41, had enough personal financial resources to fund Viva La Pasta, a gourmet pasta shop, restaurant, marketplace and cooking school in West Des Moines, Iowa, when she opened in 1984, but she decided it made better business sense to take out a loan to finance part of the start-up expenses. So Swartz and Rhoda Kreamer, her mother and business partner, put together a presentation, complete with business plan, charts and samples, and headed off to the bank to make their pitch.
"We made all of the charts ourselves--and we're not good at this, but we're good at cooking," Swartz says. "So we went to the bank loaded with charts and food, leaving an aroma trail like the Pied Piper. We went into the conference room and started talking while we were feeding [the bankers]. Thirty-five minutes later, they finished eating, we finished talking--and we had lumps in our throats when we told them how much money we wanted. And these bankers sat back, patted their bellies and, with satisfied smiles, said, 'You've got a fine little business idea there.' "
That note was paid off in six months, and the next time Swartz wanted to borrow money, she didn't have to cook for it. Why do it the first time? Says Swartz, "You have to play to your strengths."