Start small, grow toward financing your business
Published in The Tennessean August 26, 2013
By Ed Rappuhn, Chairman – SCORE Nashville
“I need financing for my business; where do I start?”
The answer can depend on where your business is in its life cycle. If you are a start-up, the answer is often “friends and family.” This is the number one source for financing of new businesses, and often the long-term results are superior. Many successful businesses started with very little initial financing and without fancy amenities.
Traditional financing through a bank is available for businesses that have a solid track record and can show that they have good growth opportunities, but it is difficult for most new businesses to obtain. Banks will require several things to finance your business including: (1) a high credit score by the owner(s), (2) a solid business plan, (3) collateral to ensure payment of the loan, and (4) owner investment in the business. They also like owner experience in the industry.
Small Business Association (SBA) loans are often offered (sometimes required) by banks financing small businesses. There are several SBA options including special opportunities for veterans, exporters, seasonal businesses and others. There are even small SBA loans available outside normal commercial banks. An SBA loan means that the bank’s risk is reduced because the SBA is guaranteeing that a substantial portion of the loan will be repaid. This means that the bank and the SBA must both approve the application. You will also pay a somewhat higher rate of interest to cover the SBA’s guarantee.
“What about grants?” For-profit businesses generally find that grants are not available. We continually see for-profit businesses pay those peddling access to grants, only to be disappointed. Only in the most rare of circumstances, when a business is providing a significant societal benefit or recovering from a disaster, are grants realistic.
“Well, what about angel investors and venture capital firms?” These alternatives are available to start-up and expanding businesses with high growth potential. If you are in the 1-3% of small businesses that has a unique idea that can revolutionize a marketplace and are willing to give up a portion of your business to the investors, these alternatives may be available. Generally, these require an exit plan that involves selling your business to a larger organization or a possible IPO (initial public offering). We can introduce you to sources such as the Nashville Entrepreneur Center if you have a truly high potential business.
Since many start-ups find outside financing a challenge, the best alternative might be to start small. Grow your business slowly and profitably. Listen to what your customer says. Adjust your offerings to meet specific needs. Use profits to grow the business. Banks and others will be impressed with your success. As you develop a track record, obtaining outside financing becomes easier and you will most likely have a better product or service than you had at the outset.
SCORE mentors can help you through the alternatives to starting or growing your business, including viable financing options. Sign up for a free SCORE mentor, find out about our reasonably priced workshops and other services, or volunteer to become a SCORE member at www.scorenashville.org. Email questions about starting or growing your business to firstname.lastname@example.org and watch for the answers in future columns.