3.0 Debt Capital

FUNDING A BUSINESS >> Each section contains key Action Items located within the downloadable Action Guide >> Click to Download Action Guide.

3.1    Friends and Family

  • People that know you best
  • Loans are often between $500 and $20,000
  • Friends and family investments may prefer equity investments
  • Who do you know? Who do they know? Can they invest?

Do you plan to own a small business?

If so, consider a loan with a reasonable interest rate.

A large percentage of entrepreneurs utilize loans and investments from friends and family that know, like and trust them.  This section briefly addresses loans from friends and family members.  The “equity ownership” plus investor search process is very thoroughly explained in Section 5.2 entitled “Private Equity – Friends and Family.”

Seeking money from family and friends can lead to soured relationships if the business does not succeed.  Nobody likes to lose money, however when possible, seek loans and investments from friends and family that have the ability to potentially “absorb” a loss if the business fails.  The last thing anyone wants is to have a friend or family member suffer long-term financial difficulties due to the failure of your business.

There are unlimited deal structures that can be created with friends and family.

You suggest to the investor what you are willing to give up based on the confidence in your business.  However, remember the Golden Rule, he or she who has the gold (cash), makes the rules.  It is YOUR job as the entrepreneur to stand firm when seeking cash for your business.  You have created an opportunity for an investor that should provide a nice return on their money.

Keep in mind; loans become debt that must be repaid.  If you choose a debt structure, start first with trying to acquire a straight loan that will be repaid at a favorable percentage rate agreeable to each of you.  Try to secure a year or more before loan repayments must begin.

If the banks are offering loans at 6% interest, you might consider offering 8% to 10% interest based on the investor’s risk.  If you provide collateral (assets that will be given to the investor if the business fails and you cannot repay the loan) then you can be competitive with the banks and you should seek a bank loan as well.

Formalize Your Loan in Writing

Creating a loan with a promissory note and payback schedule can be accomplished between you and the individual who loaned you the money pretty easily.  You can search the Internet for a basic promissory note or simply create a written agreement that describes your loan agreement, payback rate and schedule and the consequences of failing to repay the loan.

SEE SECTION 5.2 FOR A VERY DETAILED EXPLANATION ON HOW TO SOLICIT FRIENDS AND FAMILY FOR BOTH LOANS AND EQUITY INVESTMENTS.

ACTION ITEMS: Complete the Action Items in your Action Guide.

MAKE a list of friends or family you could contact to invest in your company?

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HIGHLIGHT the people who can absorb a loss if the business fails.

3.2    Credit Cards

  • Easiest way to get funding for your company
  • Interest rates are generally very high
  • Most common financing source for businesses
  • Great to use for funding short-term cash crises
  • Use only as your primary source of capital when you expect other sources of cash
  • Can you access credit card financing?
  • How much?
  • How quickly can you pay it back?

Credit cards can be a source of capital for early stage entrepreneurs; however, many entrepreneurs find themselves buried in credit card debt without having enough revenue to pay down their credit card bills.

Therefore, it is imperative that early stage entrepreneurs have clarity in their business model and stay employed as long as they can while building their business before taking on credit card debt.

Credit card debt requires a survival mentality and a complete tenacity for success!

Failure is not an option.

If you’re willing to take the plunge, apply for several cards at the same time to gain the maximum credit limits across multiple credit cards.

Credit card companies will check your credit score upon each new credit card application.  Each new credit card application, credit card issued and credit limit in your name has the potential to reduce your credit score and therefore reduce further credit limits that credit card companies will extend to you.

Search Google “credit card offers” to uncover the best interest rates and competitive offers.

However, when applying for a new credit card, open a new Internet browser and go directly to the credit card company’s website to apply for their credit card.

This will reduce your chances of providing your personal data to a fraudulent company.

ACTION ITEMS: Complete the Action Items in your Action Guide.

WARNING:  YOU MUST HAVE “CLARITY” IN YOUR BUSINESS MODEL BEFORE ASSUMING CREDIT CARD DEBT AND HAVE A SOLID PLAN FOR OTHER RAPID “FOLLOW ON” SOURCES OF CASH.

ANSWER these questions regarding credit cards:

  • Can you access credit card financing?
  • How much?
  • How quickly can you pay it back?

RESEARCH the Internet to get an idea of the available credit card offers. Make a list of those with good terms such as: low APR, and zero APR for 6 or more months, etc. List them here:

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3.3    Charge Cards

  • Similar to credit cards, except that the full balance must be paid in its entirety at the end of every 30-day cycle
  • Allow the entrepreneur or business owner great flexibility
  • Can you purchase any of your required products from stores that offer charge cards?

ACTION ITEMS: Complete the Action Items in your Action Guide.

LIST the stores that you buy business related products from that offer charge cards:

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LIST the business related products you can purchase from other stores that offer charge cards:

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3.4    Home Equity Loans

  • A Home Equity Loan is a loan that is secured by the home in which the business owner lives
  • Can often provide a substantial amount of capital to the business
  • Interest rates for home equity loans are low
  • Business owner’s house becomes collateral for the loan
  • Entrepreneurs should expect a return on their dollars in a short period of time
  • Do you own a home?
  • Do you have available equity?

ACTION ITEMS: Complete the Action Items in your Action Guide.

ANSWER these questions:

  • Do you own a home?
  • Do you have available equity?

NOW schedule a time to visit your bank to discuss your options.

3.5    Lines of Credit

  • An amount of cash that a bank or other financial institution makes available to you
  • Example: $100k line of credit
  • Generally allowed to use them for anything your business legally desires
  • Can be made with and without collateral and are known accordingly as secured and unsecured lines of credit
  • Do you have an established business with a track record?

ACTION ITEMS: Complete the Action Items in your Action Guide.

PRODUCE your track record if you have an established business.

CALL local banks or other financial institutions to learn about their requirements.

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3.6    Bank Loans

  • Pay interest and are given all of the capital at once
  • Example: $100k bank loan
  • Great source of inexpensive capital
  • Typically only available to mature businesses
  • Require extensive documentation, including the past three years of your business operating results
  • Is your business qualified?

Commercial banks usually require operating history, revenues and collateral in order to get a loan, however, it’s still a very good idea to establish banking relationships in the early stage of your business.

Begin by researching the local banks that seem to be “entrepreneur” friendly by contacting local entrepreneurs within your network.  Find out whom they use as their banker and ask whether they are happy or not with their current banking relationship.  Listen, listen, listen.

Getting referred to a banker by a successful local entrepreneur within your network can be a great way to begin your banking relationship.

Typing a letter or sending a handwritten note to the President of your local bank is also a great way to introduce yourself and begin your banking relationship.  You might convey that you are starting a new business and would like to introduce yourself before you choose your banking relationship.

He or she may refer you to an officer within their bank, but often times the President will meet with you before introducing you to someone on their staff who can further assist you.

Starting at the top of an organization always provides the ability to reach out to the President or CEO if needed without “overstepping” any employee since you started your relationship with the top leader.

Cultivate your relationships!

Keep in touch with the President or CEO by sending an occasional handwritten note or postcard and an occasional e-mail.  Make sure there is a reason why you are contacting them such as giving them an update on your business, asking them a well-constructed question or the best reason is to refer a potential new customer to them.

Give value first and you will always receive value in return.

Shop around for the best lending deals for your company because banks are always competing and you must determine your needs with their offer to get the best deal.

The bank representatives will inform you of their lending process in your initial meeting.  Typically, the loan process will require you to gather personal files and paperwork as support documentation for a loan.

The bank will check your credit score, outstanding debt and credit limits, payment history, assets, mortgage payments, salary, revenue and they may even call on personal and business references for background checks.

Be prepared by gathering and organizing your financial details in advance of your meetings.

ACTION ITEMS: Complete the Action Items in your Action Guide.

START researching local banks to find one that is “entrepreneur” friendly.  Ask your network for recommendations. List them here:

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NEXT, call and visit each bank to meet key people involved in helping entrepreneurs and small businesses.

WRITE a brief letter to the President of each bank to introduce yourself and to show your interest in the bank. Follow up with a call to set a time to meet, if possible.

SEND thank you cards to every person involved in this process – those from your network, the bank’s employees, the President, etc.

3.7    Peer-to-Peer Online Lending

Peer-to-peer online lending services have become a great way to help fund entry into a low-cost business opportunity.  If you have a promising story and a compelling business idea, you may well have the ability to raise up to $25,000 through the following lending services.

The process can take time, however, many entrepreneurs have successfully raised money with the following peer-to-peer online lending services.

www.prosper.com

www.lendingclub.com

www.kiva.org

ACTION ITEMS: Complete the Action Items in your Action Guide.

VISIT these peer-to-peer lending services and search others to learn more:

www.prosper.com

www.lendingclub.com

www.kiva.org

RESEARCH the businesses that have raised money through peer-to-peer online lending services and then contact them if possible. Ask them if they would share some details about the experience with you. List any businesses you found:

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3.8    SBA Loans

An overview on SBA loans

  • Key source of financing for many firms
  • “SBA” is an acronym for the U.S. Small Business Administration
  • U.S. Small Business Administration guarantees a large portion of the loan, making their investment less risky
  • SBA still requires banks to adhere to traditional commercial loan underwriting principals
  • SBA’s guarantee enables banks to loan more money
  • SBA loan sizes can vary from as little as $5,000 to as much as $2 million
  • Maximum SBA Guarantee to the bank or partner institution is limited to $750,000
  • Repayment terms range from 5 to 25 years
  • Require down payments ranging from 10% to 30% of the size of the loan
  • Easier to get than traditional bank loans
  • Longer payment terms
  • Is your business qualified?

View the SBA’s website for more information:  Click for SBA.gov

ACTION ITEMS: Complete the Action Items in your Action Guide.

FIND out if your business can qualify for a loan.

CLICK on the Business Help menu on this site to get SBA lending help.

Next – 4.0 Other Financing »