Smart Ways To Finance Your Startup
   By Terry M. Blair

Don’t make the local bank your first stop when looking for startup capital. Instead, look at alternative sources of cash. They could provide the money you need to launch your entrepreneurial business.

“Not all new ventures require large infusions of capital,” says Dr. Chad Moutray, chief economist for the Small Business Administration (SBA) Office of Advocacy. “Everyday ordinary Americans strike out on their own to grab their piece of the American Dream. It doesn’t take a lot of savings to participate in the ownership society, just a good idea and lots of hard work and perseverance.”

You may need less startup capital than you think, according to the 2003 report “Expected Costs of Startup Ventures” released by the Office of Advocacy. The report focuses on a two-year study of nascent entrepreneurs—individuals who are planning to start a business or who are in the process of starting one.

Solo entrepreneurs expect median startup costs of $6,000, according to the report.

That’s not peanuts. But it isn’t enough to interest traditional bankers either. So it’s no surprise that more than 80 percent of the entrepreneurs studied for the report said that they expected to cover their startup costs without bank loans.

If you want to launch your startup without the backing of a traditional bank loan, here are some financing possibilities:

SBA Microloan
These loans are designed for startup businesses. They range from $10,000 to $35,000 and are offered through nonprofit community-based lenders. Interest rates vary, and the maximum term is six years. You can find out more at www.sba.gov. These are the smallest loans available through the SBA, so if you need less than $10,000 to get your business going, look elsewhere for the money.

Line of Credit
Many banks offer revolving lines of credit for small-business owners. After you establish the line of credit, you can tap the money as you need it and only pay interest on the outstanding balance. A simple one-page application is usually required for loans that range between $10,000 and $50,000. Again, if you need less than $10,000 to launch your startup, consider other financing options.

Credit Cards
Used wisely, credit cards can be a convenient source of money for startup entrepreneurs. Be sure you apply for a business, rather than a personal, credit card. Use the card only for business purposes so that your business and personal expenses remain separate.

If you anticipate carrying a balance on your credit card, find the lowest interest rate available. Beware of low introductory interest rates that skyrocket after a few months. You can compare interest rates and features of different card offers at www.bankrate.com.

Credit cards used exclusively for your business offer several other benefits. The interest you pay on the card is a tax-deductible business expense. And many cards provide detailed expense reports that help you manage bookkeeping tasks. Some cards also offer travel and other small-business services.

Family and Friends
Plenty of entrepreneurs get the startup cash they need from supportive family and friends. If you take this path, stay on the straight and narrow.

Draft an official promissory note, complete with paperwork that states the amount, interest rate, repayment schedule and terms of default. If a personal lender wants collateral to back the loan, decide what you’re willing to offer and include the arrangement in the note.

Getting your agreement hammered out in writing will prevent misunderstandings among friends and family. And having the loan on paper is the only way you can legitimately deduct the interest you pay as a business expense.

Bootstrap
There’s no shame in starting small and building your business. It’s called bootstrapping. Successful entrepreneurs have been doing it for years.

True bootstrappers pace themselves, only spending as they earn. If you decide to bootstrap, here are some tips to make it work:

• Get a firm handle on billing and collections. Send invoices to customers promptly. Set strict payment terms and enforce them.

• Work with suppliers. Ask for the maximum amount of time to pay your bills. And always pay on time to avoid interest charges.

• Buy only what’s required for your new business now. You can upgrade computer equipment, office furniture and other necessities when the big bucks come rolling in.

>>Back to Startup Success