Finding Money to Start Your Business
A few energetic entrepreneurs are able to finance a business themselves. However, most entrepreneurs will find it necessary to locate at least partial funding for their operations. To obtain funds to start a new business, you need to answer the following questions:
How much money is needed?
What kind of money is needed?
Where can the money be found?
How much money you need will depend on the nature of your business. Statistics indicate that on average 30% of small business start-ups require an initial investment of less than $10,000. Sample start-up costs may include the following:
Living Expenses for Owner
Cost of Building (Purchase or Rent)
Equipment
Salaries and Wages
Inventory
Advertising
Telephone
Utilities (including deposits)
Insurance
Legal Expenses
Supplies
Licenses
Opening Promotion
Chamber of Commerce Dues
Remodeling and Decorating
Petty Cash
Sources of Funds to Start a Home-Based Business
Personal Savings: Examine Personal Savings and Money Market Accounts for reserve funds to invest in your business.
Loans from Family: A friend or relative may be willing to lend you money at a low interest rate. It is recommended that you set up family loans in a business-like fashion.
Partnership: If you choose a partnership, your partner will be contributing financially to the business.
Home Mortgage: If you own a house that is already mortgaged, you can apply for a second mortgage on the amount of equity you have in the property. Equity is the value of the property beyond the total amount owed on it. The risk involved is that the bank can claim your house if you do not meet your mortgage payments.
Credit Cards: You can borrow for the short-term on credit cards, usually at a higher interest rate than the prevailing interest rate.
Banks: Lending institutions offer short - medium - long term business loans at prevailing interest rates. Banks usually require some collateral against default. If the amount needed is less that $2,000, banks will advise you to request a personal loan rather than a business loan.
Life Insurance: Some insurance companies will lend you money against the cash value of your life insurance policy.
Small Business Administration: These programs offer loans, loan guarantees, and grants to small businesses. The Small Business Association has helped many small businesses get started, including those unable to obtain financing from other sources.
College student, Catesby Jones, started a $4 million business promoting Peace Frogs with a $5,000 loan from a friend. Jones markets t-shirts, shorts, sweatshirts and accessories bearing a cartoon frog with an outstretched hand displaying a peace sign.
Small Business Opportunities, January 1997
Creative mom, Yla Eason, created a $5 million business selling African American, Hispanic and Asian dolls with ethnically correct features. Her business, Olmec Toys, Inc. started with $60,000 borrowed from family.
Good Housekeeping, November 1996
Prepare for the lender interview by anticipating the kinds of questions a lender will ask you. Gather and analyze all the personal financial data that shows you are a good credit risk. Prepare to explain your business plan, dress professionally, and approach your lender as a business professional.
Questions Asked by a Lender
How much money will you need?
How do you plan to use the money?
How long will it take you to repay the loan?
Can you afford the current interest rate?
What can you offer as collateral?
How much money do you personally plan to invest?
How will the business benefit the community?
Personal Financial Data to Show a Lender
*all outstanding loans, their original balances, amounts outstanding and current monthly payments
*total monthly mortgage or rent payments
*net monthly income for outside job or other sources
*current value of all assets including real estate, expensive equipment, stocks, bonds, etc.
*list of credit cards and current balances
*tax forms from the previous two years
**Statement of Financial Needs - This form will show the total cash you have on hand, your total estimated expenses and how much you will need to borrow over a certain period of time.
**Balance Sheet
**Income Statement
**Break Even Point
Conclusion
At some time during the operation of your business, you may find it necessary to seek outside financing. This information provides you with a starting point in finding the money that you need.
Balance Sheet:
An Analysis of What a Business Owns and Owes at a Certain Point in Time
Assets - Liabilities = Net Worth
Assets: Anything of monetary value that the business owns.
Liabilities: Debts owed by the business.
Net Worth: The difference between assets and liabilities.
Current Assets:
Accounts Receivable $10,000
Cash $ 5,000
Inventory $ 8,000
Total Current Assets $23,000
Fixed Assets:
Equipment $ 5,000
Computer System $ 4,000
Total Fixed Assets $ 9,000
Total Assets: $32,000
Liabilities
Current Liabilities:
Accounts Payable $ 3,000
Accrued Wages $ 1,200
Total Current Liabilities $ 4,200
Long-Term Liabilities:
Note Payable $ 8,000
Total Long-Term Liabilities $ 8,000
Total Liabilities $12,200
Total Net Worth $19,800
Gross Sales - Returns = Net Sales - Cost of Goods Sold = Gross Profit
Gross Profit - Expenses = Net Profit (loss) - Taxes = Net Profit (loss) after taxes.
Gross Sales $75,000 Returns $ 1,000Net Sales $74,000
Beginning Inventory $ 3,000Purchases $ 1,500
Ending Inventory $ 1,000
Costs of Goods Sold $ 3,500
Gross Profit $70,500
Expenses:
Rent $ 6,000
Salaries $40,000
Advertising $ 3,000
Telephone $ 1,200
Interest $ 2,400
Depreciation $ 2,000
Miscellaneous $ 1,000
Total Expenses $55,600
Net Profit $14,900
Tax $ 4,470
Net Profit After Taxes $10,430
References:
Adapted from Entrepreneurship: Growing Success from the Ground Up (Western NC Entrepreneurship & Heritage Skills Education Committee of the NC Cooperative Extension Service) by Davina Hickman, Family and Consumer Agent, North Carolina Cooperative Extension Service, 1996.
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