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SMALL BUSINESS: The cash to turn your idea into reality

By Rita Liazuk

You have that one “GREAT IDEA” to start or expand a business. You see a need that you can fill; and you just know you will be a huge success.

Then, you wake up from your dream when you realize that you need to find out how to finance it. The question you ask yourself is: “what’s the best way to come up with the capital I need to start (or expand) my business?”

First Things First: Develop a Business Plan

Even though it may seem overwhelming, it’s important not to skip the first step in obtaining capital: you have to develop a business plan. Whether you do a formal plan or simple financial projections, sit down and crunch the numbers. Make sure the plan works in your mind and on paper before you present it to a prospective financial partner. A business plan typically includes:

Your background

A business summary

Industry background and demographics

Target market information

Financial data on employees, salaries and benefits, overhead and projections

Your company’s competitive advantages

Current financial statements and projections

After you have completed a business plan, you can look at the two ways to finance your business: with equity (your and other owners’ own money) or with debt (borrowed money).

Equity is money that is received in exchange for a share of ownership in the business.

Advantages of equity financing:

Equity contributions do not have to be paid back even if your company goes bankrupt.

Your business assets do not have to be pledged as collateral to obtain equity investments.

Businesses with sufficient equity will look better to lenders, investors and the IRS.

Your business will have more cash available because it will not have to make debt payments.

Debt refers to any money that your business borrows that you will need to repay eventually. Debt is usually obtained from banks and other traditional lenders, but also may be obtained from other individuals. Debts will usually require monthly payments of principal and interest over a fixed period of time.

Advantages of debt financing:

You do not have to give up any ownership or future profits of your business. Your lender doesn’t have any control over how you run your business. Your only obligation to the lender is to pay back your loan.

Using borrowed money to obtain business assets allows you to keep your business profits in the company.

Interest paid on the loan is generally tax deductible.

Types of Debt Financing

Conventional Bank Loans – The most common resource for funding – financial institutions – will provide a loan if you can show that your business proposal is sound. To be successful in obtaining a loan, you must be prepared and organized — know exactly how much money you need, why you need it and how you will pay it back. The business plan is a critical component to help make your case.

SBA Loans – The Small Business Administration (SBA) has several programs available to assist small businesses. The SBA guarantees a portion, generally anywhere between 50 & 75 percent of the loan amount made by local banks and other lenders to qualified small businesses. The SBA has developed a Preferred Lenders Program where the SBA has delegated the power to make credit decisions on its behalf to local banks based upon their experience and continued commitment to participate in the program. Commerce Bank is a preferred lender.

Venture Capital Firms – Venture capital and private equity firms are pools of capital that invest in companies representing the opportunity for a high rate of return, usually within five to seven years typically through the sale of all or a portion of the company. Keep in mind that each round of financing will require you to surrender equity ownership.

Angel Investors – Angels are typically successful small business people, professionals and, occasionally, high-level executives of large companies who enjoy investing in startups. You can usually find these people by talking with accountants and lawyers in your area. Angels tend to invest together, which is often referred to as “cluster” investing, for added security and to maximize their varied experience.

Clearly, the options for small businesses in the Bloomington area to raise capital are diverse and numerous. Remember to have a plan in hand when seeking funding for your enterprise. Also, when you are ready to select your financial partner, look for a lender who begins by asking about your individual financial needs and goals before recommending a solution of financing options.

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