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Lottery Tickets

A friend once dropped by to invite me to accompany him to the local convenience store to purchase a pair of lottery tickets. He was excited about the prospects of winning what amounted to five or six million dollars at the time. I politely declined his offer indicating that I preferred to retreat to my backyard to do some digging. Puzzled, he inquired as to the purpose of my digging - reasoning undoubtedly that there would be plenty of time for puttering in the garden when we returned. I nonchalantly replied that I was eager to begin digging in search of the pot of gold that was potentially buried in my backyard.

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Frustrated, my friend wandered off in the direction of the convenience store shaking his head and muttering under his breath something about lost marbles and the loony bin. The fact was, that my odds of discovering a fortune in buried treasure in my backyard were slightly greater than my friend's odds of winning the lottery.

The lottery and other forms of legalized gambling should not rate high on your list of potential funding alternatives.

Personal Savings

Ideally you should have sufficient cash in a liquid savings account to meet all of your start-up costs as well as see you through two to three months of operations. If you do not have this amount of money saved up then you should strongly consider one of two options:

  • Begin more modestly - perhaps on a part time basis from your home to minimize start-up expenses.
  • Hold off for a few months until you can save more money.

The desirability of starting your business debt free cannot be overemphasized. Excessive debt is one of the greatest contributors to small business failure in this country. Shunning debt will give you flexibility and peace of mind and allow you to remain in control of your business instead of being controlled by it.

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Friends and Family

While loans from friends and family are certainly among the most common sources of start-up capital for new business ventures they are not without their problems. Often these loans are made reluctantly out of a sense of duty. If your business fails and you become incapable of repaying these loans in a timely manner - or worse yet, not at all, long term resentments may result and relationships may suffer. A flippant or less than professional attitude toward loans of this nature leads many small business owners to neglect their commitments and repayment obligations to these trusting individuals. Think carefully about the potential consequences of borrowing from friends or family before making a request.

Private Investors

There are many wealthy individuals in communities across the country that are seeking opportunities to invest in high growth companies. Unfortunately, there are two significant barriers that you will face in obtaining this type of financing. First of all, these individuals are not easy to find. Second, they generally prefer to work with someone who has a proven track record.

Locating private investors can present a real challenge. One of the best resources I can think of are the "Angel Investor" databases that have cropped up recently on the Internet. There are a number of sites such as Source Capital Network that specialize in pairing entrepreneurs with potential investors.

The Small Business Administration has an excellent database that matches investors with fast-growing small businesses. The Angel Capital Electronic Network (Ace-Net) is an Internet based service which posts listings of high-growth businesses and venture capitalists.

Ace-Net limits participation to investors (referred to as "Angels") that demonstrate a financial net-worth exceeding $1 million or an annual income greater than $200,000. The SBA requires that all potential investors submit financial statements to prove financial capability. Once approved, investors are provided with a password and given access to the network. Access by investors is password restricted to ensure the privacy and security of the network.

Small businesses seeking venture capital (referred to as "Gazelles") must show a modest track record. Currently, a business must be generating annual sales of at least $100,000 and show a doubling of revenues in the past four years to qualify for a listing.

Participants in the network - both businesses and investors, pay a modest up-front fee to be listed with the service (typically under $500). Investment opportunities on the network range from $250,000 to $5 million.

The SBA estimates that each year over 250,000 investors nationwide invest about $20 billion into small, high-growth businesses.

You can access the SBA site over the Internet at sba.gov or call your regional SBA office for additional details on the program.

In addition to the Internet listings, local CPA firms can often be a source of information on potential investors. These firms have their finger on the pulse of many wealthy individuals. What is more, they usually have a solid understanding of the needs, requirements and risk tolerances of each of their clients. The right introduction could lead to a legitimate funding opportunity. Business brokers are another potential source of contacts. Investors will often call on business brokers to inquire about opportunities to invest in small but promising companies.

Be aware that private investors will often be looking for some kind of equity stake in your company. If you are willing to cede some ownership and control, it is possible to gain access to sufficient capital to give your business a fast start.

As a brand new start-up organization, if you are to have any success at all in attracting financing from private investors you must have a well-documented and highly polished business plan. A good business plan will summarize your business objectives and articulate the marketing, operational and financial strategies you will employ to achieve those objectives. A business plan does not have to be lengthy, but it does need to be credible and persuasive.

Wildly optimistic revenue and income projections have no place in a professional business plan. Remember that these investors didn't get where they are by being financially naive. It is certainly good to appear ambitious and aggressive, but sales projections that are seven standard deviations beyond the best case scenario are not likely to impress anyone. Keep things real and count on your credibility, enthusiasm and professionalism to carry the day.

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Bank Loans

The old adage that "the only ones who can qualify for a bank loan are those who can prove they have absolutely no need for the money" is sadly not far off the mark. Banks generally like to see a record of healthy sales and profits before they will undo their purse strings. In addition, there is the matter of collateral. Banks are notorious for demanding collateral well in excess of what seems adequate to secure the loan. Their rule of thumb seems to be "the more the better". Being highly collateralized allows the bank to foreclose quickly on collateralized property and effortlessly sell it at fire sale prices to satisfy the loan obligation in the event of a default.

The key to obtaining bank financing is to begin to develop a relationship with a lender early on. Open up a business bank account and maintain a reasonable positive balance. Take out a small loan collateralized by a certificate of deposit and pay it off promptly. Discuss your business with the lender and let him know that in time you will require additional funding to finance your projected growth. Ultimately you should request a revolving line of credit that is accessible upon request and payable within a short period of time - generally a couple of months. This is basically an ongoing working capital loan which can be drawn on and paid off over and over to provide the liquidity you need to meet your payroll and other obligations while you wait for your accounts receivable to come in.


Microlending is quickly becoming an important source of funding for small businesses. Microloans are defined as business loans under $100,000. According to the Small Business Administration, microlending activity is growing more than 25% per year, with total funding now approaching $16 billion.

Microlenders are typically community banks which have chosen to allocate a portion of their resources to this fast growing segment of the market. The SBA maintains a listing of the most active microlending institutions in each state.

Generally, microlenders will impose documentation and lending requirements similar to those seen on traditional loans. The advantage of working with microlenders is that they specialize in small business loans. They understand the needs of small businesses and have the expertise and resources necessary to meet those needs.

Non-Bank Finance Companies

There are numerous Non-Bank Finance Companies that cater to the financing needs of small businesses. Because they specialize in lending to small businesses, they are typically more creative in their approach to lending. They are also typically more expensive than their traditional-bank counterparts.

Be aware that because they are accustomed to making riskier loans, they will want to be well collateralized. They are also very sophisticated and efficient when it comes to foreclosing on collateral in the event of default.

Many of these companies have minimum loan thresholds measured in the hundreds of thousands of dollars. There are, however, companies willing to provide secured and unsecured lines of credit, equipment leases and other forms of financing to small businesses in lesser amounts. These regional and national non-bank lenders can be found in the Yellow Pages under Financing.

SBA Loans

The Small Business Administration (SBA) loan is a business loan made by a local lending institution and guaranteed by the federal government. This loan program is designed to provide small businesses with important access to capital, which as we have already discussed is often difficult to come by.

While it is sometimes easier to qualify for an SBA loan than a conventional business loan, you should not assume that the process will not be stringent. If you are serious about obtaining SBA funding you should be as thorough and meticulous in the application process as you would be for any other type of loan. Although the federal government guarantees the loan, it still must be funded from the bank's limited pool of lending resources. Additionally, the Small Business Administration is coming under increased pressure to push a portion of the loan liability back onto the local lending institution. Simply put, if you are not considered a good risk, you may have difficulty in qualifying for an SBA loan.

Credit Cards

You would be hard pressed to find a more expensive source of financing than a consumer credit card. While it is true that many credit card companies are offering marvelous introductory rates to attract new customers, these rates usually are only good for a very limited period of time - typically six months or less. The astute credit card companies have discovered through experience that the average hapless consumer will jump at the opportunity to receive easy credit at such a low rate. Within a very few months most of these cards will be charged to their maximum limits. When the introductory rate expires, the consumer, having no way to pay off the balance, watches helplessly as the interest rate doubles or triples. After five or six years of making minimum payments, the credit card will finally be paid off. Over that time the consumer will have paid the credit card company three or four times what was originally borrowed.

Many financial institutions have begun to offer business credit cards. These cards are designed to provide small businesses with a modest line of credit to finance their start-up and ongoing operations. While business credit cards typically carry a higher interest rate than conventional lines of credit, if used carefully they can help a new business establish credit with a lending institution.

No purchase should be made on a credit card without a plan to pay off the balance within a matter of a few months. The idea behind a business credit card is to provide a business with short-term liquidity - not saddle it with long-term debt.

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