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        Small Business Financing, Loans and Venture Capital.

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        Small Business Financing, Loans and Venture Capital



        Another AHBBO Article
        Financing Your Home Business

        © 2016 Elena Fawkner

        So, you have a great idea for a business and, more importantly,
        the know-how to bring it into creation.  The only thing you抮e
        missing is the cold hard cash to get started.  What are your
        options? 

        Assuming you don抰 have a ready line of credit, an expansive
        bank manager, wealthy relatives or a substantial stash of
        retirement savings you抮e willing to risk,  you抮e going to have to
        do some serious homework and legwork.  Fortunately, there
        are a number of sources of finance for the fledgling small business
        entrepreneur, at least one of which may be right for you.


        SBA LOANS

        Available only to U.S.-based businesses (but look for similar
        programs in your own country if you抮e outside the U.S.), the SBA
        (the U.S. Small Business Administration) has assisted thousands
        of entrepreneurs start their own small businesses.  The SBA
        doesn抰 issue grants (money you don抰 have to pay back) or make
        loans directly, rather, it guarantees loans made by private lenders
        thereby reducing or eliminating the risk inherent in new business
        ventures and making lenders more willing to lend.

        The primary consideration for the SBA is repayment ability from the
        cashflow of the business as well as 揼ood character, management
        capability, collateral and owner抯 equity?  You will be expected to
        personally guarantee your loan.  This means your personal assets
        are at risk.

        As for the types of businesses eligible for SBA loans, the SBA
        imposes the following criteria: the business must be 揻or-profit?(all
        that means is that your business has a profit motive, not that it 
        has actually generated a profit yet), be engaged in business in the
        United States, there must be 搑easonable?owner equity (what抯
        reasonable will depend on the circumstances) and you are expected
        to use alternative financial resources first, including your own assets
        where practicable.

        The SBA also imposes limitations on the use of loan proceeds. 
        For example, although the proceeds can be used for most business
        purposes (the examples given by the SBA include 搕he purchase of
        real estate to house the business operations; construction,
        renovation or leasehold improvements; acquisition of furniture,
        fixtures, machinery and equipment; purchase of inventory; and
        working capital?, you can抰 use the loan proceeds for financing
        floor plan needs, to pay existing debt, to make payments to the
        business owners or to pay delinquent taxes etc.

        As a general rule, loans for working capital must be repaid within
        seven years and loans for fixed assets must be paid for by the
        end of the economic life of the assets (but not to exceed 25
        years).

        Interest rates are negotiated between the borrower and the lender
        but the SBA imposes maxima which are pegged to the Prime
        Rate.

        Finally, the SBA charges lenders a guaranty and servicing fee for
        each loan approved, and there is nothing preventing the lender
        oncharging these fees to the borrower.  The guaranty fee for a loan
        of $150,000 or less is 2% of the guaranteed amount; over $150,000
        but below $700,000, it抯 3% and above $700,000 it抯 3.5%.  The
        annual servicing fee is 0.5% which is calculated on the then-current
        loan balance.

        Where the borrower meets the SBA抯 credit and eligibility
        requirements, it will guarantee up to $85% of loans $150,000 and
        less and up to 75% of loans above that amount (up to a maximum
        of $1,000,000).

        For more information about the various SBA loan programs, visit
        the SBA website at  http://www.sba.gov.


        PRIVATE GRANTS

        At present, there are no U.S. government grants offered for small
        business.  If you're outside the U.S. check with your own
        government about the availability of small business grants.  You
        never know! 

        Various corporate grantmakers make grants available for small
        business though.   For more information, visit
        http://foundationcenter.org/find-funding .


        ANGEL INVESTORS

        Angel investors are good souls with a healthy sense of self-interest. 
        Figuring they can get a higher return if they抮e prepared to take a
        bit of a risk, they抮e also often successful entrepreneurs themselves
        and want to give their fellow travellers a hand up.

        Think of funding from an angel investor as a bridge or gap-filler
        between being a start-up and qualifying for venture capital.  The
        kinds of dollars we抮e talking about here are between about
        $150,000 and $1.5 million.  Beyond that point you抮e in low
        venture-capital territory.

        The SBA estimates that there are around 250,000 angels in the
        U.S., funding about 30,000 companies a year.  So, how do you
        hook up with one?  Not an easy task, unfortunately.  It comes
        down to networking.  Start by talking to professional and business
        associates - they will often know someone who knows someone
        etc..  Also, check out ACE-net if you抮e prepared to sell a security
        interest in your company.  It抯 an internet-based listing service for
        securities offerings of small, growing companies. 


        VENTURE CAPITAL

        You抮e in the big leagues now.  Generally you抮e in the ballpark
        of millions (of dollars that is) rather than thousands.  Venture
        capital firms look for their return on investment from capital
        appreciation rather than interest (unlike banks, for example). 
        They抮e generally looking for a return of 500-1,000% on exit.

        It won抰 surprise you to learn that venture capitalists are particularly
        leery of internet-based businesses right about now and not
        surprising.  It also serves them right.  But if you have a solid
        business plan and strong growth potential, this could be an option
        for you longer term.

        One of the common concerns about this form of financing, however,
        is that you may have to part with an unacceptable amount of
        control over your own business.  In return for their risk, venture
        capital firms will usually want some control over how the business
        is run and a say in business decisions.  A venture capitalist will
        expect a seat on the board, for example.

        It抯 important to remember, though, that it抯 in the venture
        capitalist抯 best interests for your business to succeed, so giving
        up some control in exchange for outside expertise may well be
        something worth thinking about.

        To find venture capitalists, get a hold of 揚ratt抯 Guide to Venture
        Capital Sources?for a listing of 1,500 or so including names,
        contact details and areas of interest.  Of course, you'll find no
        shortage of information online as well.


        For most readers of this article, your best bet would be to start
        out by investigating the various loan programs offered via the SBA
        (or your country抯 local equivalent).  But don抰 overlook more
        obvious, close to home sources first.  If you have family funds at
        your disposal (for example) and you抮e confident that your
        business will succeed (and unless you're confident about that, don't
        get into debt with *anyone*, let alone family members), better to
        start out slow and ease into outside sources of financing as your
        business (and, more importantly, your business抯 cashflow) can
        support it.  After all, Uncle Jack is much more likely to be
        understanding about the occasional cashflow crunch than Uncle
        Sam.

        _________________________

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        ** Reprinting of this article is welcome! **
        This article may be freely reproduced provided that: (1) you
        include the following resource box; and (2) you only mail to a
        100% opt-in list.

        Here's the resource box to use if reprinting this article:

        Elena Fawkner is editor of Home-Based Business Online. Best business ideas and opportunities for your home-based or online business.

        Copyright 1998-2017, AHBBO.com. All rights are reserved. Tuesday, 26-Jan-2021 03:05:51 CST

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