Securing Financing

[interpathway 9]

Spitting ideas of a SB (small business) with a friend, and one crucial point of contention is the securing of financing to get the ball rolling (gotta have money to make money, right?).

Neither of us studied business but there are plenty of people out there running shops or websites that have gotten financing to lift their ideas off the ground.

My initial thought is a business plan presented to a bank's loan officer?

edit:

Anyone with personal experience, your thoughts are highly encouraged!

[Chadd 916]

business plan , background info on the principles and a whole lot of luck. Banks are not lending much right now. For a startup, they may very well want some type of collateral.

[RadioGaGa 162]

business plan , background info on the principles and a whole lot of luck. Banks are not lending much right now. For a startup, they may very well want some type of collateral.

Which can be scary if all you have are personal assets (house/car etc...)

[Jason Harris 31]

When I started my business, I learned that it was easier (as well as better rates) to get a personal loan than one for a business with no track record.

[interpathway 9]

Thanks for the replies so far guys.

JHarris, that's a great point, I'm assuming the eligibility of obtaining a personal loan relies more on credit history than proper and sound business plan... but could the two be used in conjunction to secure a better rate/probability of acquiring the loan?, or would having a business plan attached forced the loan officer to recommend taking out a business loan?

In essence, if I decide to go the personal loan route, should my motives (i.e. business plan) be kept under wraps?

[shooter27 116]

Everyone is correct, banks are not lending much to startups at the moment, but there are other sources of capital.

1. SBIC Lenders - There are a number of firms out there that focus on making SBIC compliant loans. Some of these are directly tied to banks, some are independent.

2. Angel Investors - These are generally groups of wealthy individuals who have been successful that come together to seed startup companies. The issue here is twofold. First, they will generally want a piece of the equity of the business, not just give you a loan. Second, they're generally looking for business with very large potential market opportunities that can be built and sold off, or invested in by large venture capitalists. The reason for this is because they own equity, therefore they need to be able to exit that equity to realize profits on the investment.

Of course, there are also venture capitalists as well, but VCs are looking for business that have the potential to be massive. If your goal isn't to turn it into a billion dollar business quickly, VCs are likely not a good option.

[Chadd 916]

2. Angel Investors - These are generally groups of wealthy individuals who have been successful that come together to seed startup companies. The issue here is twofold. First, they will generally want a piece of the equity of the business, not just give you a loan. Second, they're generally looking for business with very large potential market opportunities that can be built and sold off, or invested in by large venture capitalists. The reason for this is because they own equity, therefore they need to be able to exit that equity to realize profits on the investment.

Of course, there are also venture capitalists as well, but VCs are looking for business that have the potential to be massive. If your goal isn't to turn it into a billion dollar business quickly, VCs are likely not a good option.

Unfortunately, both of those options are usually looking at short term ROI and not the long term health of a company. They want in and then out fast, and at a profit.

[Axxion89 32]

Never hurts to look for private investors also. A business plan is a must and one with very good projections, research, outlines will increase your chances of getting a loan. A few simple but in depth surveys of the area, a SWOT analysis of yourselves and the competition as well as the projected demand for whatever you are starting depending on socio-economic status of potential customers and the financial environment during such times are all aspects that when looked into and formulated into a plan a presented well, can help get a loan in today's economy.

[wrangler 157]

How small? The size of the amount needed may dictate the potential sources to be considered; anywhere from family and friends, to VC firms (probably equity, not debt).

Talk to loan officers at more than one bank, just to consult. They'll be able to answer your questions regarding their own requirements. If you're in the U.S., check into SBA loans -- they may be worth a look.

As to a business plan, you'll want that, even for yourself, especially to estimate capital needs. It's a cliche that the main reason for a new business failing is undercapitalization.

Good luck.

[shooter27 116]

Unfortunately, both of those options are usually looking at short term ROI and not the long term health of a company. They want in and then out fast, and at a profit.

Without a doubt, their focus is on the IRR of the investment. VCs in particular tend to be very short-term focused. Angels (depending on the group) tend to be, at least a bit, more patient because they don't have investors to answer to and they don't need to show high IRR's in their ppm's when they raise their next fund. They're investing their own money and they have plenty of it so they're more comfortable sitting on an investment for long periods if necessary (assuming the business doesn't require additional financing).