Stanford University

How to Finance Your New Business

There are many creative ways to finance your business. Here are some common and creative ways to finance your business venture.

Family and Friends

1. Write a business proposal as if you were going to write one to obtain a loan from a banker. Discuss what the business does, the market demand for the product or service, how you intend to market your product or service, include financial projections: in what time frame do you anticipate the business will be making a profit. Include financial statements and tax returns.

2. State how much money you need, what the money will be used for and the terms of the loan such as the interest rate, how you intend to pay the loan back whether this be in a lump sum or in scheduled payments. You should also state whether the loan is secure, that in the event you are unable to pay the loan the lender will have a percentage of ownership in the business. In making your proposal more attractive to the lender you may consider having a promissory note or agreement stating the financial terms, scheduled payments and entitlement to the business in the event the note is not paid.

3. Do not forget the tax benefits in using a promissory note, if for some reason you are unable to repay the loan in full, the lender will be entitled to a tax deduction known as "bad debt". Warren Buffet who is now the second richest person in the world with an estimated net worth of 40Billion, raised $ 105,000 for his first business from 7 partners, two of which were his sister and aunt.

Equity in Exchange for Expertise

If you have a brilliant idea you maybe able to find others, who in exchange for there services are willing to accept some form of equity. This can be legal services, engineering services, or marketing services, the possibilities are endless. For example: many new start-ups require legal formation such as becoming a corporation. You can contact licensed attorneys in your area, who specialize in start-ups, many attorneys if the idea is one where the potential for future profits is great, will agree to postpone legal labor costs, and will request you only pay upfront costs, such as the filing fees. You can offer anywhere from 1-2%, for the postponement of legal fees and agree to pay the legal fees once funding has been obtained.

People are eager to be apart of the next big thing, in giving an attractive proposition with reasonable terms and conditions you can create winning business relationships allowing for your company to grow and become successful. Countless start-ups have utilized this financial strategy in launching their business. When Google was just an idea, Google's Larry Page and Sergey Brin, had convinced their landlord to take stock in their company in exchange for free rent.

Commercial Loans

In applying for a commercial loan there will be many paper requirements, which generally include your business plan, financial statements, credit report, incorporating documents and tax returns. A commercial bank will evaluate your business on the basis of the 5C's of credit:

1. Capital- how much of your own money do you have in the business

2. Character- your reputation in business, they will look at your credit score, credit history, such as making your payments on time, the amount owing to other creditors and if you have any judgments or liens.

3. Capacity- your business cash flow and the ability to repay the loan.

4. Collateral- assets you business owns such as equipment or real estate as security for the loan. Potential Guarantees that is someone else's ability to repay the loan if you do not.

5. Conditions- how do you intend to use the funds and for what purpose.

In applying for a commercial loan you want to investigate several lenders, as to what businesses they finance, compare interest rates and terms.

Small Business Administration Loans (SBA)

In the event you are unable to obtain a commercial loan you can apply for a SBA loan, as a requirement in applying for a SBA loan is you have to have sought out a loan from conventional lenders and were unable to obtain a loan at reasonable terms . The SBA guarantees 75% or up to $ 750,000 of the loan made by a private lender. As the business owner you must personally guarantee the loan and demonstrate your cash flows are sufficient to repay the loan.

Angel Investors and Venture Capital

Many start-ups have received Angel investment. Angel investors specialize in early stage financing. They are often more willing to invest in ideas where there is too much risk for a bank and not enough potential for a venture capital firm. They usually invest smaller amounts anywhere from $ 100,000 to 3Million and are willing to invest for the long haul- 5 years or more. Many times companies will start with an angel investment, in the event the company becomes a high net worth company and huge profits are easily foreseen a Venture capitalist is most likely to become involved.

Venture Capitalists specialize in high growth industries and rarely invest less than 5Million at a time, as they want the company to grow quickly, ideally having the company go public, so as to cash out in the shortest time possible usually 3-5 years. It can be extremely challenging obtaining venture capital, on average venture firms receive 1000's of business plans yearly and are highly unlikely to invest in a business that was not referred to them by an acquaintance. It is estimated that only 1 in 600 business plans received from Silicon Valley venture firms even get consideration let alone funding.

In order to increase your chances of funding, it is recommended you join business associations and business organizations that have the involvement of venture capital firms, this way you can network and make valuable contacts. In the meantime, while you are networking and getting your name out there, continue to build and refine your product or service making it better each and everyday. Do not be discouraged if your business plan is rejected, as this is very common and does not mean you do not have a great idea or business. Scott Cook, founder of Intuit with a 2Billion plus company which provides accounting software – Quicken and Quickbooks, was rejected by every venture firm in 1984, the venture firms said, most people do not have a computer let a lone require computer accounting software, therefore not a large enough market exists for us to invest in it.

Home Equity Lines of Credit

If you own a home with a substantial amount of equity you many want to consider obtaining an equity line of credit as they offer some of the best interest rates available. It is important to consider all the risks carefully, as you need to make monthly payments and do not want to lose your family home to launch your new venture.

Business Plan Competitions

Business plan competitions are a great source in obtaining capital to start your new venture when you do not have the connections to angel investors. Business plan competitions have become very popular in the last few years many universities and leading companies have business plan competitions. You submit your executive summary or business plan, and if selected usually pitch your business to a group of judges who will award funding to the best business ideas. Some competitions have restrictions where you have to be affiliated in someway.

The Stanford University business plan competition requires 50% of the team members be Stanford graduates, while others are open, such as the Rice University business plan competition, where they allow graduates from all parts of the globe to apply. In April 2009, the Rice University had 42 groups present their business ideas before a group of judged, 3 of which were awarded a payment of $ 125,000. A list of For business competitions visit: Http://www.nytimes.com/interactive/2009/11/11/business/smallbusiness/Competitions-table.html .

Credit Cards

Credit cards can be a great source to quick cash. Many credit cards offer cash advances at very low interest rates for the first 6 months, which you can transfer after the low 6 months interest rate has ended. Usually credit cards can be a short term fix to a financial need, but they are not recommended for the long-term.

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