How to Finance Business Start-Ups

Bank loans offer an attractive source of capital, but are often hard to land.

Starting a new business is a monumental task. Acquiring financing for a new business is a critical first step for any start-up; nothing else can happen until funding is in place. There are a variety of sources to go to for capital including personal savings, bank loans, investor loans, equity partners, equipment leasing companies, and venture capitalists and angel investors. Each type of financing brings with it its own pros and cons, but there are a few critical steps that must take place before any of these sources of capital can be approached.

Instructions

1. Write a solid business plan. Without a business plan no equity partner or creditor will even consider giving you money. Go to your local Small Business Administration (SBA) office or SCORE office to get help in writing a business plan if you've never written one before. Every business plan should clearly spell out the market demand for your product or service, as well as your marketing strategy.

2. Create "pro-forma" financial statements. Pro-forma financial statements are a set of projections showing the planned growth and profitability of your business. Potential sources of capital will want to understand how they will recoup their investment if they get involved in your start-up. Pro-forma financial statements can be created by business planning software or a spreadsheet program such as Microsoft Excel. Consult with a CPA or other business adviser when you have completed your pro-formas, and get their advice on your business model.

3. Apply for credit. Before looking for equity partners or angel investors try to apply for bank financing. Take your business plan and pro-formas to a bank that is known for making small business loans, and request a meeting with a loan officer. Show the loan officer your business plan and pro-formas and ask them for a credit application.

4. If a bank will not offer you financing, ask some local business professionals like attorneys or accountants how you can get in touch with investors that would consider taking an equity stake in your company. They may refer you to retired business professionals or to a venture capital company. Take the same approach with these individuals as you did with the bank.

Tips & Warnings

• If you take on equity partners be sure you have your attorney draft an operating agreement that spells out which partners are responsible for what and who controls the operations of the company.

• If you do secure bank financing be prepared for them to ask you to post personal collateral for the loan. If your business fails to repay the loan, the bank will expect you to repay it personally.

References

• Entrepreneur: Start-up Business Financing
• SBA: Finance Start-up
• Investopedia: Pro Forma

Resources

• Score: Financing Your Business