Cream of the Crop 1/Cream of the Crop 1.iso/BUSINESS/SBA62.ARJ/FSBA.EXE/F211.SBE

Text File | 1992-04-30 | 8KB | 141 lines

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

           "A dollar borrowed is a dollar earned." -- Jenkins'
                    Second Law of Business Survival

If you need to raise funds from other parties to start your business,
the types of capital 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 gen-
erating 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 in-
vestment 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 capi-
tal investment.  They are usually looking for a well-balanced manage-
ment team with technical, marketing and financial expertise, poised
for rapid growth and expansion.  Thus, if you are a typical small busi-
ness 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
want your firstborn child and a 40% return on their investment just for
starters.)

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.  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 from us, at the address on the sign-on screen).  You
can use it to prepare a professional-looking loan application package
that will create a favorable impression with most loan officers.

  (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 MESBIC's.
(See paragraph (g) below.)  It has a very limited budget for making
direct loans itself.  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 loans
      exceeding $155,000.  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 lender, not the SBA.

    . DIRECT LOANS.  If you are unable to obtain sufficient con-
      ventional 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 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 dis-
tressed 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.

  (d) U.S. Dept. of Commerce.  The Economic Development Administration
(EDA) of the Dept. of Commerce makes direct loans and makes loan guar-
antees 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) Farmers Home Administration (FmHA).  The FmHA works much like an
SBA for rural areas, or in towns of under 50,000 population.  Like the
SBA, the FmHA 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 busi-
nesses providing services to farmers, for purchasing land and equipment
and for start-up 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 MESBICs.  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
Minority Enterprise SBICs (MESBICs) 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.

SBIC and MESBIC loans are usually subordinated to loans from other
creditors and are typically made for 5-7 year terms.  Both types of in-
vestment companies are privately-owned and thus tend to favor loans to
established companies with significant net worth, rather than new
business start-ups.  MESBICs serve only those small firms that are
owned by members of economically or socially disadvantaged groups.

  (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....