Starting business starts with financing

Whether you˜re thinking of going into business or have been in business a year or two, sooner or later you˜re going to want — or need — a loan.
For startup companies, there are a variety of places to seek additional capital, be it for equipment, payroll or expansion. Before you start knocking on doors — either that of the bank, your local Small Business Development Center or your Uncle Bob — the experts say you need to have a detailed business plan that accurately reflects your business.
Assuming you do, it˜s time to search for a loan.
In Colorado, as it is nationwide, the most prevalent avenue of financing for new businesses is through personal investments.
"Seventy percent of businesses are started with nonfinancial-institution money," said Russell Disberger, director of the Institute for Business Development at Aims Community College˜s Corporate Education Center.
Business owners use a number of personal resources, such as home-equity loans, retirement funds, savings accounts and even credit cards, though no one recommends the latter.
"Home-equity loans are one of the best sources to get started," Disberger said.
Banks typically offer up to 125 percent of the home˜s value for the second mortgage. Usually, there is no cost to obtain such a loan, the turnaround time to obtain the loan is relatively short, and the interest rate is more desirable than a commercial loan.
"A lot of times if you get a commercial loan from a financial institution, to leverage or minimize their risk they take a second (mortgage) on your home anyway, so why not use your home without a lien?" he said.
The No. 1 personal resource, however, is credit cards. No one, however, recommends it.
"You˜re paying an exorbitant rate for short-term funds for a long-term asset," Disberger explained, conceding that sometimes it˜s the only way out of a financial bind. "In the past (when he was a business owner himself) I charged payroll on my credit card. It˜s the only way I could do it. I don˜t recommend it."
Another place to look for funds is through family and friends. Provide them with a copy of your business plan so they can see how the business operates and how they stand to gain. Experts caution, however, that any financial deal with relatives or acquaintances should be documented as it would be for any other investor, not just by a wink and a handshake.
Sometimes, though, the only way to keep your business running is with the help of an angel, in this case, a business angel. These are people who are personally worth $1 million or more and who invest in small businesses.
"Most angels will invest with a business that is within a day˜s drive of their location," Disberger said. "Some want to feel, touch and smell the business, others want to invest and not have anything else to do with running it.
"You have to be as careful about borrowing from them as from family," he added. "You might have made a deal with the devil."
How do you hook up with an angel? Small Business Development Centers and some Chambers of Commerce can help arrange meetings with potential business angels. You can also search Angel Net, a Web site that helps angels and entrepreneurs hook up. Ohio State University has an entire department devoted to national research for the angel network and works closely with a national incubator association.
Closer to home, Disberger is setting up an automated Rocky Mountain Angel Net, and the Boulder Technology Incubator has a state angel network in place called Colorado Capital Alliance. The latter has an annual fee of $200 for entrepreneurs.
Business angels are everywhere and in surprising numbers. In the Greeley area alone, for example, Disberger estimates that about 300 to 400 potential business angels exist.
If your company is on the verge of going big-time or has something very dynamic going for it, however, then you might think about approaching venture-capital firms. These are large conglomerates of business individuals who pool funds in tens of millions of dollars. Venture capital, however, is typically available to less than one-half of 1 percent of all new businesses.
They look for companies to invest in that have been around no less than two years and have the potential of pulling in more than a million in sales.
"Some people see venture capitalists as vultures," Disberger said. "Some can be the best thing or the worst. It goes back to doing your research."
Government-financed and backed sources are additional avenues for business financing. Many of these sources are outlined in the Colorado Office of Business Development˜s Small-Business Startup Kit.
For example, the Small Business Administration offers both guaranteed and direct loan programs. Guaranteed loans may be financed for seven years on working capital, 10 years for equipment and up to 25 years on real estate. Interest rates vary depending on the lender, the market and the term of the loan.
The SBA offers direct loans only to Vietnam-era veterans, disabled veterans and individuals with disabilities. It also has special loans for targeted industries, such as the Export Revolving Line of Credit International Trade Loans and Solar Energy & Conservation Loans.
The SBA can also provide information on Small Business Investment Corporations and Minority Enterprise Small Business Investment Corporations, both of which are privately owned and operated companies sponsored by the federal government. They invest funds in small companies as either equity or debt. Local Development Companies work with banks or other financial lenders on ventures important to the local economy.
Farmer˜s Home Administration has several financing programs for businesses and family farms. One option under FmHA is the Business and Industrial Loan Program, which provides loan guarantees for business and industrial development in nonmetropolitan areas of Colorado. Priority is given to rural communities and towns of 25,000 or less. Loans may be used for working capital or purchase of fixed assets.
Likewise, the Colorado Housing and Finance Authority offers a number of loan programs to small businesses. These include the Quality Investment Capital program, in conjunction with the SBA; the Colorado Credit Reserve, designed to increase Colorado businesses˜ access to small commercial and agricultural loans of $100,000 and less; the Rural Development Loan Program, which can be used for real estate, inventory or working capital; and the Colorado International Capital Corporation, which provides working capital loans to small businesses that export or import.
Your search for financing can often take you to unexpected sources.
The Greeley/Weld Economic Development Action Partnership Inc., for example, administers the Weld/Larimer Revolving Loan Fund, which is funded through the U.S. Department of Housing and Urban Development.
Jodi Hartmann, the EDAP vice president who administers the program, said there are 15 revolving funds in Colorado. The Weld/Larimer revolving fund is geared toward businesses in rural areas of both counties, including such communities as Eaton, Windsor, Mead, etc., but not those in the cities of Fort Collins, Greeley or Loveland. The program targets manufacturing and distribution businesses because they bring money into a community, though some loans have been made to retailers.
Program guidelines state that the loan is for gap financing and is not intended to be the majority of financing.
"We can loan up to 45 percent of what a company is needing," Hartmann said. And for every $20,000 that is loaned, one full-time equivalent job must be created. The program also stipulates that 51 percent of these new jobs go to low- to moderate-income individuals.
The Enhancement Program, as it also is called, has existed since 1991. In that time, $2.4 million has been loaned to 22 different companies resulting in $9.6 million in private financing with a total capital investment of $11.9 million. The program has also created 500 full-time jobs and 512 part-time jobs.
"These are good numbers for a small loan program," Hartmann said.
Some Front Range cities, such as Fort Collins and Loveland, have what are called MicroLoan Guarantee Programs. In Fort Collins, the loan program, patterned after that of Loveland, is geared toward for-profit businesses with sales of less than $500,000 and fewer than 20 employees, said Frank Pryor, director of the Small Business and International Development Center in Fort Collins, which co-sponsors the program with the Fort Collins Economic Development Corp., the city of Fort Collins and five Fort Collins banks.
In addition, those seeking loans of $1,000 to $10,000 need to be located in the urban growth area and be unable to secure traditional bank financing for machinery and equipment, working capital, borrower-occupied tenant finish or to leverage private debt.
The bottom line in looking for money, Disberger said, is your passion.
"If your idea is good, if you have a solid plan, and if you have passion, despite your credit history and how much cash you have in your business, because of your passion, you should be able to convince someone to lend you the money," he said.