Traditional Bank Lenders -The most well known source of lender for small business is the community bank. This is typically a small bank or chain of banks in a region that service the local business community. The attitudes of banks toward start-ups depend heavily on the financial conditions in the marketplace and the availability of funds. In recent years, most community banks have been quite reluctant to risk lending money to small start-up organizations, unless they are very well collateralized and have demonstrated a strong business idea via their business plan.
SBA Loans - This is a misnomer. The SBA does not make direct loans. They guarantee certain loans that banks might make. The process is the same as seeking a loan from a bank. The bank may turn down the loan but suggest that the applicant apply for an SBA guaranteed loan. Or the bank may not inform the applicant that they might qualify for an SBA guarantee (some banks do not place much marketing value on the SBA relationship). In that case, it is up to the applicant to seek help from the SBA directly. The SBA guarantee is not a given. The SBA will employ much of the same approval criteria as the bank, though it may be guided more by a social policy or program rationale.
Angel Investors - Angel investors are independent business organizations that typically invest their own funds to lend to a new business organization. The funding organization may be a trust, a business, an investment fund, a LLC or a variety of other types of structures. Typically angel investing is a second round of financing for high growth start-ups, as the angel investor is generally looking for a return of at least 10 times the original investment within a 5 year period through a well defined exit strategy such as an IPO or an acquisition. Angel financing is very difficult to obtain due to the selectivity of the lenders, as their criteria are very stringent. There are over 250,000 angel investors in the U.S. with the average loan approximately $500,000.
Investment Bankers - This is a very well known, visible source of funds, but is almost never viable for a small business start up organization. They seek to provide funding for large companies in amounts exceeding $1MM via the issuance of stocks or bonds for the client organization.
Grants - One of the great wishes of many small business start-ups is they will be able to get a grant to start their business. While there are definitely grants available for start-up's, they are extremely difficult to obtain, normally are restricted to specific demographic groups (i.e.,veterans, minorities, etc.) and projects that have a proven societal need such as technology R&D, community action organizations, etc. To search for available grants, we suggest going to www.sba.gov -- a website that will guide you through the process of qualification for grants and then determining whether there is a grant available to match you specific business plan.
Credit Cards - A new business owner should use credit card debt very carefully...or not at all. The interest rates are extremely high compared to traditional lending sources, and they are often so high that it may be very difficult to ever pay off the principle. Also, credit terms keep changing and there are expensive penalties for late or insufficient payments. There are few third party lending sources that are interested in loaning money to pay off existing debt.
SUMMARY - Financing a new business can be the biggest challenge that the entrepreneur will face. A key point to remember is that CASH IS KING and you must have sufficient cash available to start and then run your business. Therefore ensure that you have done careful planning for you cash needs, and then have generated sufficient funds to have on hand to start your business. Lack of operating funds is one of the three main reasons that small businesses fail. Plan for your cash needs so you do not jeopardize your venture.
CHAPTER FIVE - Legal Structure of Your Business
Introduction - Before reading this chapter and the next, please understand that any issues relating to legal matters should only be decided by a practicing attorney with your guidance and perhaps the input of an accountant. In writing this book we are not professing to be giving legal or accounting advice, but rather, the intent is to provide an overview of the legal environment which you will encounter as you try to determine the type of structure that would be best for your organization. Hopefully the content in this chapter and the next will give you sufficient information to be able to ask better questions of your attorney when you make these decisions.
Key Issues to Consider when Selecting an Organization Legal Structure - There are five major issues that must be considered when selecting the right type of structure for your business. To the extent possible, it would be best that you familiarize yourself with each of them, and possibly determine how you feel about each of these before meeting with your attorney as the time with this individual will be reduced, thus saving you time and professional fees.
Owners Liability - This refers to the extent of the financial exposure you will have as an owner of the business. Unless the form selected provides limited liability, the owner's personal assets are exposed to claims of creditors or claimants of the business. The type of organization does not protect the owner from tort claims although insurance can be obtained to handle this situation. A tort claim is a claim against the business or its employees for damage to or loss of property or personal injury or death.
Control - Control of the entity is an issue anytime more than one person is involved as an owner or shareholder in the business. The extent to which owners can participate in the management will depend heavily on the choice of business entity.
Transferability of Ownership Interests - This is the consideration for the ability to transfer the ownership of the business entity without disturbing the continuity of the business. All ownership interests are transferable, but the convenience or ease of transfer differs substantially among various forms of business entity.
Organization and maintenance costs - This refers to the needs of the entity to maintain books and records in order to comply with public rep* Tax Considerations - The tax considerations relative to going into business or changing the form of a business are extensive and very complex. They can certainly affect the type of structure that is selected for the entity.
Overview of the Various Business Structures - The following will summarize the most important information the entrepreneur needs to know about the various business structures that are available. Its focus is on the major issues relating to each structure, and is not intended to be a thorough legal interpretation of the details, advantages and disadvantages of each.
Sole Proprietorship - This is a situation where one individual operates a business solely without any type of incorporation. It is the easiest business to organize and has the fewest reporting requirements. The profit or loss from this business is reported on Schedule C of the Federal Tax return. The owner is free to make all decisions in this structure. The owner is personally responsible for all the debts of the business. One of the major drawbacks of the sole proprietorship is that the business ends with the death of the proprietor. Therefore, the small business started and 100% owned by the father, must change its form if the venture is to be carried on by the son when the father leaves the business.
Partnership - This is an arrangement whereby two or more people make a legal contract to operate a business. It is very easy to organize. A written partnership agreement is strongly recommended but is not required. Partnership income and expenses flow through to the individual partners and is reported on Schedule C of the individual partner's federal tax return. Decisions make by the partnership depend on how the ownership of the entity has been decided. A general partner is personally liable for all debt of the entity. For limited partners the liability is generally limited to the investment they have in the partnership.
Many people come to SCORE thinking that a partnership is the best way to organize their company. They want another person to share the costs of start up, help with getting the sales and marketing