By Mark Buescher, C.P.A.
All small businesses start with something in common: they devour cash. They need cash for inventory, office space, insurance, legal fees, business licenses, remodeling costs, and the list goes on. Whether starting a business or even expanding, adequate capital is essential. In fact, the right sources of funding could make the difference between success and failure for your business. If you’re thinking about starting a small business, here are some financing sources to consider.
Personal Assets. The advantages of tapping your own bank account are obvious. You don’t have to pay the money back; you don’t incur interest; you don’t have to grovel at a loan officer’s feet. The disadvantages may not be as clear. Other priorities – college savings, retirement plans – can get shoved aside. So if you’re going to use your own assets, set limits. Decide how much risk you’re willing to incur, and don’t deviate.
Friends and relatives. Convince your brother and golf partner that your idea is the greatest thing since sliced bread, and they may provide seed money for your new enterprise. If they lend you cash, be sure to set up a formal agreement spelling out the loan details (interest rate, loan term, payment schedule). And remember, many a family relationship and golf partnership have been ruined when a business fails and loans can’t be repaid.
Home-equity loans and lines of credit. Another possible source of financing, the equity in your house can often be tapped either through a fixed rate loan or a variable rate line of credit. These sources of financing tend to have much lower interest rates than credit cards or personal loans. The disadvantage, of course, is that your house is on the line. Fail to make the payments and you could face foreclosure.
Banks and credit unions. Financial institutions are often reluctant to lend money to businesses without a proven track record, especially in today’s credit-challenged market. But that doesn’t mean you shouldn’t try. To increase your likelihood of success, take time to lay out a detailed business plan (a good idea whether or not you ever visit a bank), and be able to justify your business needs in writing. Generally, local financial institutions are the best source of small-business financing, especially short-term loans. If you need a single-purpose loan for machinery or equipment, or a single line of credit, contact your local financial institution. In Madison County alone, we have five strong financial institutions to choose from.
Economic Development Programs. Many federal, state and local governments offer small business loan and incentive programs. Often, special consideration is given to ethnic groups, women, veterans and companies located in designated urban and rural locations such as Madison County.
Funding through these special programs may require a great deal of documentation and tangible assets, primarily real estate or equipment, as collateral. One of the most prevalent of this type of governmental loan is through the Small Business Administration (SBA).
Other sources of start-up financing include retirement plans, grants, even credit cards. Remember to think through the amount needed and have a realistic plan for repayment. Cash flow is generally more important than profitability.
However, the critical element in receiving approval for funding is whether or not your business qualifies as a “good risk.” When you apply for funding, be prepared to have your business undergo intense scrutiny. The groundwork you do in advance should uncover any issues that you’ll need to address during the funding process.
Mark Buescher, CPA is owner and principal of Buescher and Ruff, LLC, a local full service accounting firm in Madison, specializing in tax preparation, business consulting and tax planning. Tax laws contain varying effective dates and numerous limitations and exemptions that cannot be summarized easily. For details and guidance for your specific situation, contact your tax advisor.