Getting Started Part III: The Money Chase

akgold — Sun, 22 Jul 2007 22:01:00 GMT

Finding the capital you need to get your business started may be easier than you think.
By Max Berry

You've come up with a business idea; you've done the necessary research and written a sure-fire business plan. Now what's the next step? Finding the money to turn that business plan into reality. There is a wide array of potential sources of funding available to entrepreneurs. Each comes with advantages and downsides.

All in the Family
Friends and family members are often the first place a budding business owner turns to when looking for money to start his or her company. “Your family is a great starting place for a loan,” says Skip Honigstein, chairman of the Orlando chapter of the Service Corps of Retired Executives (SCORE). “If you have a strong idea, the first people you are most likely to persuade are those who know you the best.” Honigstein notes that family lending is particular common among many immigrant communities, in which families often work together to launch new businesses. “You’re also likely to get much more favorable repayment terms from close relatives than you would from any bank,” he adds. If your family can’t fund your fledgling company directly, they may still be able to help obtain funding from a bank or other financial institution by guaranteeing a loan. Ted Waitt co-founded Gateway Computer in 1985 with a $10,000 loan guaranteed by his grandmother. Today Gateway has revenues of almost $4 billion a year and employs over 1,600 people.

Of course seeking money from family members and close friends has its risks as well. "Money issues can poison what were once close relationships," says business consultant C. Davis Fogg. Being in debt to the bank is one thing, feeling indebted to a family member or friend is a much more personal experience. “If your business runs into trouble and is slow to repay a loan—or unable to repay altogether—that can create serious problems with the family members who gave you the money. Remember, you don't have to spend Thanksgiving with your bank.”

"If your business runs into trouble and is slow to repay a loan—or unable to repay altogether—that can create serious problems with the family members who gave you the money. Remember, you don't have to spend Thanksgiving with your bank."

Play Your Cards Right
Increasingly, budding entrepreneurs are turning to the easiest form of borrowing around—credit cards. "Many people use their personal credit cards to start a business,” Honigstein says. “Credit cards offer a quick and convenient way to purchase needed assets while spreading out the costs over time.” Nevertheless, like any other borrowing instrument, credit cards demand careful use. “You need to watch the balances and make certain not to take on more debt than you can handle." Interest rates on credit cards often rise after certain debt levels have been reached, as well as in the event of a late or missed payment, which can cause your debt to increase rapidly.

“There are genuine advantages to using credit cards wisely,” says Gerri Detweiler, author of The Ultimate Credit Handbook. “Credit cards also provide convenient billing statements that allow you to track expenses,” she adds. However, using personal credit cards can negate that advantage by mixing your personal finances too closely with those of your business. “If you are late with a payment or run too high a balance on a personal card that you are using to run your business, your credit rating will suffer.” That can hurt you in the long term if you need to borrow money for non-business related reasons—car loans and home mortgages, for instance. Detweiler advises trying to separate your business and personal finances as soon as possible.

“Most banks and other lenders are working hard to recruit new small business customers,” she says. “So as soon as you file the forms with the state to open your business, you may find yourself deluged with business credit card offers.” Detweiler says that business credit cards will help insulate your personal credit rating from any trouble your business experiences. (To find and compare business credit card rates, try searching my3cents.com or bankrate.com.) Many business credit cards offer some form of rewards program for specific purchases that can result in considerable savings on items like office supplies. “You should definitely take advantage of rewards programs,” Detweiler says. She adds that having more than one business credit card is often useful because the rewards programs and rates and fees vary significantly between different cards.

The Traditional Approach
Beyond family and credit cards, there is still the traditional bank loan. Many first time entrepreneurs are wary of approaching a bank with plans for a new business, assuming that they will be rejected, but today most banks are eagerly looking for small business accounts. “Banks are going out of their way to find new businesses,” says SCORE’s Honigstein. “But you will still have to demonstrate to them that your idea is workable and that you are a good risk.” That means providing them with a well-conceived, well-researched, clearly written business plan. “Your presentation to the bank needs to be professional in every way,” Honigstein advises.

Among other things, banks will scrutinize your financial history, including your credit record. So make certain you have resolved any outstanding issues before applying for a loan. The Small Business Administration (SBA) has a program to assist entrepreneurs with the process of obtaining a new loan and works with participating financial institutions to provide small business loans for startups. You can learn more about the SBA small business loan program at sba.gov.

Max Berry is an Associate Editor/Writer for Business 24/7 Magazine.

Getting Started: Part I

akgold — Sat, 21 Jul 2007 00:33:00 GMT

Be sure to do all your homework before you take the plunge and start your own business.
By Max Berry

So you want to start your own business? Maybe you have an idea you think is so good, you believe it will be a sure-fire hit. Or perhaps you are simply sick of working for someone else and just want to strike out on your own. The first step in founding a business is to define exactly what your new business will do, in as specific terms as possible.

If you don’t have a specific idea for a business of your own, you might want to consider buying a franchise—that is, opening an outlet of an existing successful business. If you have your own idea for a business, the first thing you should do is to write that idea down on paper. You can start by writing down a general idea, and then develop it, narrowing its focus. “Too often,” says management consultant C. Davis Fogg, “people have too vague an idea about what they want to do. Just saying ‘I want to open a store,’ or ‘I want to build computers’ isn’t enough. A small business can’t be General Motors—it needs a tight focus in order to distinguish itself from the competition.”

Putting your idea on paper makes it easier to focus on the details. “There is no substitute for writing it down,” say Martin Lehman, counselor at the Service Corps for Retired Executives (score.org), which helps small business owners get their businesses off the ground. “Write down your idea, and then break it down to the smallest elements: Who exactly will be your customers? What products or services will you offer?” Be specific, Lehman advises. Write an exact description of the products or services and to whom they would appeal. “Don’t just assume ‘people’ will want whatever your business is selling—try to figure out what type of people, what age, income, gender. You need to know who your business appeals to before you can judge how it will do in the market.”

Understanding the specifics of your idea is the most important starting point for launching your business. Once you know exactly what you want your business to do, you can begin to research the mechanics of your idea. Where should you locate the business? In what geographic market will your business function? What is the competition? Is there enough consumer appetite for your products or services to keep your new business going? Has anyone else opened businesses similar to yours in the area and what happened to them? What will it cost to procure the equipment or supplies you will need? This applies to franchise operations as well. Franchises generally offer fairly specific information about costs and often have rules regarding location, advertising, and the décor of franchise outlets. Still, whether a particular franchise is a good fit for a given area and for you is something you can only determine through dedicated research.

Your research might include visiting similar businesses, or even working for one in order to gain experience in that business, if you’ve never worked in a similar field. This is particularly true in the case of a franchise. “Seeing how a particular business operates on a day-to-day basis is crucial to figuring out if you actually want to run one of your own,” says Fogg.

If you have never run a business before, or have little experience in the type of business you wish to start, you should seek out people who have and talk to them about their experiences. Their advice can alert you to difficulties you may not have anticipated and point to possible solutions.

“Before I opened my first retail store, I went to several possible locations and stood outside them all day long, just watching who passed by,” Lehman says. “That way I could see what sort of people would be walking past the store on a regular basis, and then I chose the location with the most people I thought likely to buy what was in my store.”

As you progress with your research, you can begin to create a detailed business plan. Your business plan will assemble all the information you gathered during your research and translate that data into a clearly stated outline of your business.

Max Berry is an Associate Editor/Writer for Business 24/7 Magazine.

Starting A Business

Getting Started Part III: The Money Chase

Getting Started: Part I