PC Computing: Best Free Software/ZDCD.iso/top100/smalb.exe/F211.SBE

Text File | 1997-01-01 | 10.2 KB | 211 lines

@141 CHAP 9
                 ┌─────────────────────────────┐
                 │  VENTURE CAPITAL AND OTHER  │
                 │SOURCES OF START-UP FINANCING│
                 └─────────────────────────────┘

Outside financing is to entrepreneurs what steroids are to
body builders and NFL linemen -- in either case, you can't
get nearly as big nearly as fast on your own -- and there
can be some nasty side effects.

If you need to raise funds from other parties to start your
business, the types of capital that you will be attempting
to raise will fall into two categories -- Equity capital
(such as common stock or preferred stock in a corporation,
or an interest in a partnership); or Debt capital, which
includes all types of loans, whether secured or unsecured,
from the bank or from your mother.  Most new businesses
find it hard to raise equity capital, except those that
are so promising that they are able to find venture capital
investors to provide such financing.

Venture capital firms are investment firms that specialize
in making equity capital available for businesses that have
very high potentials for growth.  They usually are interested
in a small business only if it has demonstrated market
acceptance for its products or service by generating
substantial sales over a significant period of time and the
competence of the business's management in managing other
people's money (since you will be managing theirs).  They
are generally only interested where such a firm has an
explosive growth potential, as well.

Venture capitalists expect to make 10 or 15 times their
original investment in 5 years or so.  Since most small
businesses do not possess this kind of potential, the typical
mom-and-pop store, no matter how well-run and profitable,
is not a realistic candidate for venture capital investment.
They are usually looking for a well-balanced management
team with technical, marketing and financial expertise,
poised for rapid growth and expansion.  Thus, if you are a
typical small business person, you will be wasting your
time and theirs if you approach venture capital investors
for financing to get your business started.  (Besides,
most "vulture capitalists," as they are often called, will
demand your firstborn child and a 40% return on their
investment, just for starters.)

            ┌───────────────────────────────────────┐
            │KEY POINT: Venture capital accounts for│
            │only a tiny fraction of small business │
            │loans.  Don't totally rule it out as a │
            │possibility,  but realize that getting │
            │venture capital financing is definitely│
            │a long, long shot, for most startups.  │
            └───────────────────────────────────────┘

Most institutions that you should approach for financing,
such as banks, will only consider making loans to a fledgling
business (and not equity investments), thus the following is
a discussion primarily of sources of debt capital.

  (a) Bank Loans.  It may not hurt to try, but most new
businesses will find it quite hard to get a bank loan.  An
exception would be where you have a fairly large equity
investment in the business or can put up collateral, either
assets of the business or outside collateral, like a mortgage
on your home.  As a rule of thumb, you can usually get a bank
loan only if you can demonstrate to the bank loan officer
that you don't really NEED a loan.

Nevertheless, If you are planning to apply for a bank or
SBA loan (see below), get a copy of the book entitled THE
LOAN PACKAGE (you can order it by phone from the publisher,
Oasis Press, at 1-800-228-2275).  You can use THE LOAN
PACKAGE to prepare a professional-looking loan application
package that will create a favorable impression with bank
loan officers or any other potential lenders who look with
favor on someone who gives the appearance of being highly
organized and who submits a slick-looking loan application
package.

  (b) SBA Loan Programs.  The Small Business Administration
(SBA) primarily is a guarantor of certain loans which are
made by banks, savings & loans and certain other lenders,
such as SBIC's and SSBIC's.  (See paragraph (g) below.)
It has a very limited budget for making direct loans itself.
And forget about "grants" to small business startups
(despite what you may have heard on those late night TV
"infomercials") -- they don't exist, in the real world.

SBA loan programs include:

    . GUARANTEED LOANS.  Most SBA loans are of this
      variety, where banks or other lenders make the loan.
      The SBA may guarantee 90% of smaller loans, but not
      over 85% of larger loans.  Such loans usually
      require the borrower to put up a reasonable amount
      of equity and are secured by fixed assets, real
      estate or inventory (or all of the above). They are
      usually limited to 7 years for working capital loans,
      10 years for fixed assets, or 25 years for
      construction loans.  Apply directly to the lender,
      not the SBA. The maximum size loan the SBA will
      guarantee is of $750,000, and as a practical matter,
      lenders usually are not willing to process such
      loans for amounts of less than $25,000.  Loan rates
      are based on the going prime rate, with a rate of
      2 1/4% over prime for loans of less than 7 years,
      or 2 3/4% for longer-term loans.

    . DIRECT LOANS.  If you are unable to obtain sufficient
      conventional financing or SBA-guaranteed loan funds,
      you may in some cases be able to obtain a direct
      loan from the SBA of up to $150,000.  However, these
      direct loans are hard to get, and can only be made
      if the SBA has funds available.  In recent years,
      the funds available for lending by the SBA have been
      quite limited, so that eligible borrowers are
      frequently turned away because the SBA simply doesn't
      have any money to lend.

    . OTHER SBA PROGRAMS.  From time to time, the SBA is
      engaged in various other types of small business
      loan programs, such as seasonal lines of credit,
      economic opportunity loans to entrepreneurs who
      are physically handicapped, minority loans and the
      like, which change frequently. Consult your banker
      or your local SBA office if you think your firm
      may qualify for one of these special financial
      assistance programs.

  (c) U.S. Dept. of Housing and Urban Development (HUD).
HUD makes Urban Development Action Grants (UDAG) to cities
in economically distressed areas.  The cities are then able
to use these UDAG funds to make second mortgage loans to
private developers who are able to leverage these loans by
borrowing 3 to 5 times such amounts from private sources.
Such loans and grants are made for the purpose of encouraging
business investments in depressed areas.  However, this
program is no longer being funded, except in a few cities
that still have left-over funds, and is virtually defunct.

  (d) U.S. Dept. of Commerce.  The Economic Development
Administration (EDA) of the Dept. of Commerce makes direct
loans and makes loan guarantees to businesses in areas with
low family incomes or suffering from high unemployment, to
promote creation or retention of jobs for residents of such
areas.  To qualify for such financing, your business must
be located in an EDA redevelopment area and you must be
able to demonstrate that the venture will directly benefit
local residents and will not create over-capacity for the
industry in question locally.

  (e) Rural Economic and Community Development Service
(formerly the Farmers Home Administration).  This agency
works much like an SBA for rural areas, or in towns of
under 50,000 population.  Like the SBA, it guarantees up
to 90% of the amount of loans made by banks or other
private lenders.  It does not make direct loans.

  (f) Other Federal Loan Programs.  Other major federal
loan programs to businesses include Federal Land Bank
Association loans to businesses providing services to
farmers, for purchasing land and equipment and for startup
working capital, and a similar loan program for loans of
up to 7 years is provided through the Production Credit
Association and the Federal Intermediate Credit Bank.

  (g) SBICs and SSBICs.  In addition to direct loans and
guarantees from government agencies, don't overlook possible
loans (or equity financing) from Small Business Investment
Companies (SBICs) and Specialized SBICs (SSBICs) as possible
sources of financing.  Both are licensed and regulated by
the SBA to provide equity capital, long-term loans, and
management assistance to small businesses.  ("Small
businesses" are usually defined as those with a net worth
of under $6 million and which did not have net after-tax
income of $2 million or more in the past two years,
although different size standards apply in some specific
industries.)

SBIC and SSBIC loans are usually subordinated to loans
from other creditors and are typically made for 5-7 year
terms.  Both types of investment companies are privately
owned and thus tend to favor loans to established companies
with significant net worth, rather than new business startups.
SBIC lenders will usually want a loan that is convertible
into stock of your corporation, often up to 49% of the total
stock; SBIC lending, like venture capital funding, does not
come without a significant price.

SSBICs serve only those small firms that are owned by members
of economically or socially disadvantaged groups.

If you have a computer with a modem, you can contact the
SBA ONLINE electronic bulletin board (toll-free line is
1-800-697-4636) and find an updated list of SBICs (if any)
that are located in your state.

  (h) Relatives.  Finally, if all other sources of financing
fail to work out for you, do like many other people and
borrow from Mom or Dad to get started.  Just be prepared for
an unhappy family situation if the business does poorly and
you can't repay the loan.... If that happens, you'll have to
console yourself with the thought that it could have been
worse -- you could have defaulted on a loan from Bruno, your
friendly local loan shark and thumbbreaker....to whom your
body is the only collateral he needs.