Small Business Start Up Funding Encyclopedia

This Small Business Start Up Funding Encyclopedia is a quick, yet comprehensive reference guide, provided to help budding entrepreneurs find sources of start up funding for a new business. While many other financing options exist (such as invoice factoring and supplier financing), only those sources related to starting a new business are outlined here.

Traditional Sources of Small Business Start Up Funding
 
Unsecured Personal Loans
You can normally apply for an unsecured personal loan up to $100,000 from a bank, if you have an excellent credit history, low debt ratio and steady source of sufficient income. Another option may be to borrow from family members or close friends.
 
Private Equity Investors/Angel Investors
Private investor financing may be an option for you, if you are willing to give away equity ownership in your company in exchange for start up money. Essentially, a private equity investors owns a piece of your business.
 
Commercial Loans
Commercial banks offer start up loans which are usually secured on the owner’s personal property or assets. Another option is an SBA loan. The U.S. Small Business Administration offers several small business loan funding programs, which include the 7 (a) Loan, the Microloan and the SBA Express.   Keep in mind that the SBA is not the direct lender, but operates as a loan guarantor. Excellent credit and a viable business plan are required for serious consideration.

 
Grants
The U.S. government offers grant funding to select businesses, primarily engaged in education, health and human services, technology, or research and development. Please be advised that government grants are usually not a viable option for most start up businesses. A select number of private sector grants are also made available, from foundations, non-profit and for profit organizations. One source is Business Owner’s Idea Café.
 
Venture Capitalists
Usually, a group of seasoned investors that pool their resources into a managed fund. Venture capital is rarely offered below one million dollars, and usually only goes to start ups expected to yield a very high return on investment.
 
Non-Traditional Sources of Small Business Start Up Funding
 
Credit Cards
Credit card financing is one of the most expensive forms of start up funding. If your business plans involve start up with the use of credit cards, you may be setting yourself up for failure.
 
Home Equity Lines of Credit
Home equity lines are one of the more affordable means of getting your start up funded. It involves borrowing against the equity value in your home. A home equity line should only be considered, if you have an airtight business plan. Failure to repay will put your home at risk.
 
Equipment Leasing
If your new business requires the use of equipment or heavy machinery to operate, equipment leasing may be a perfect option for you. Leasing reduces the amount of start up cash you would otherwise have to raise.
 
Merchant Account Financing
This form of financing involves the selling of your future credit card sales to a finance company, in exchange for an immediate cash advance. My advice is to avoid this type of financing altogether.
 
Social Lending Websites
Peer-to-peer lending groups, like Prosper and Lending Club, match private lenders with credit worthy borrowers in an online setting. Loan terms and interest rates tend to be more favorable than traditional banks.
 
Start Up Contests
Start up funding contents may be an option for you if you are willing to do the online research it requires. Several private companies offer annual contests which award cash and various business start up services. One such contest is the “Elevator Pitch Contest”, sponsored by Start Up Nation.

 
Bootstrap Financing
Bootrapping is the art of building your business from the ground up, without the use of debt financing. This form of start up funding is embraced by entrepreneurs desiring to minimize their risk. Bootstrapped businesses also enjoy higher long term profitability, than their debt financed counterparts.
 
Start Your Small Business TODAY!
 
I hope you have found this reference guide useful, in learning more about the small business start up funding options available to you. Did you know that you can start a small business, even if you have little money, poor credit, or don’t own a home? Find free sources of business start up funding, and jumpstart your dreams of owning your own business — without BIG bank loans.
 
Learn more by requesting your free copy of “The Bootstrap Business Start Up Planner”, by visiting my website.
 
©2009 Kimberly Kelly – All Rights Reserved Worldwide.
 
Permission to reprint this article is granted strictly on the condition that it be reprinted in its entirety, with all live links and author bio in tact.

Establishing and Building Business Credit Effectively

Establishing a business credit and keeping it in excellent standing is important for any business. Even if you’ve started as a home based business or a small business, surely you have plans of making it bigger in the industry. Sooner or later, when your business gains experience in the market and your client base grows, you’ll be planning on the expansion of your business. With this in mind, having an excellent business credit to back you up would definitely be an advantage.

Perhaps you may have acquired business loans or business credit cards using your personal credit history. But once the business has been started, you should make the move to establish a separate credit history for your company. Why is this important? A business credit gives your company a more credible standing in the eyes of lenders, investors, suppliers, and other businesses that you’ll be dealing with.

How do you establish credit in business?

First, you need to set your business identity. This is done by registering your business as a corporation or an LLC (Limited Liability Corporation). You’ll also need to secure all business licenses required by your local state. Having a physical company address is another major requirement in order to be recognized as a legitimate business.

The next step would be to register with a legitimate credit business reporting agency. In the US, most businesses are registered with Dun & Bradstreet. You can fill out their online application and wait for the process to complete within 30 days. To be approved, you’ll need to provide basic details as well as financial information about your business.

Business Credit Cards for Credit Building

After receiving your D&B number, you’re ready to build up your business credit history. A great tool for credit building history is a business credit card. You can use a business credit card as support to your cash flow. Credit cards can be used for purchasing stocks, buying equipment, seeking repairs and maintenance services with the option to pay for them at a later time.

The important thing to remember is to stay within your credit limit and to submit your credit card payments on time. Remember that delays on your payment can badly affect your credit history while consistent, timely payment raises your credit business rating or Paydex score.

As much as possible, pay off your balances in full each month to avoid incurring the interest rates and late penalty charges. Although a minimum payment is accepted and most business credit cards offer a very low minimum due, it isn’t recommended. Keep in mind that the longer you put off your payments, the higher the cost of your debts would be.

Business owners are also advised to check their credit reports regularly. Obtain a copy of your credit business report from D&B and carefully examine if all information in your report are correct and accurate. If there are errors, you should immediately contact the credit bureau who issued your report so that the necessary corrections can be made right away.

Five Surprising Reasons For Business Failure And How to Prevent Them

Every year thousands of businesses fail. While most businesses failures occur during the first three years after founding, any business can fail given the right conditions. Well known and accepted causes of failure include: unmatched competition; under capitalization; runaway costs; inattention to customer needs; unmatched global pressures.

Of course, the ultimate reason for business failure is the lack of cash.

But, there are five surprising underlying reasons for business failures: Employee theft, Unplanned growth, Catastrophic information technology failures, Poor record keeping, Failure to use advisors. We will examine each and offer suggestions of how to avoid them.

1. Employee Theft

According to the U S Chamber of commerce, employees steal between $30 to $100 billion each year, and is the reason for 30% of business failures. Theft can include taking money from the till, embezzlement, stealing intellectual property, walking away with inventory. Without excellent controls in place, you may be vulnerable to employee theft. Here are some things you can do to prevent it.

Embezzlement

A trusted employee, writes extra payroll checks to self, or pays bogus invoices perhaps to accounts set up by self, or checks to cash. Sometimes the employee abuses check signing privileges, or alters a check, or forges the owner’s signature.

Prevention of embezzlement includes:
Background check of any employee handling money.
Being wary if employee appears to have money problems or overwhelming personal problems (family health issues, etc)
The business owner, or outside accountant, should open the bank statements and examine each check to verify the payee, amount, and signature.
If practical, the owner should sign checks, or two signatures should be required.
If possible, someone other than the person who writes checks should balance check book.
Theft of incoming receipts

An employee diverts incoming cash or checks to his own account or a dummy bank account.

Prevention includes:
Carefully watch receivables
Personally investigate if customers complain they are not getting credited for their payments. Get canceled check copies and examine front and back to determine if they were properly deposited in your account.
Have two employees involved in counting and verifying receipts

Cash theft

Employees who receive cash in retail establishments “dip into the till”

Prevention includes:
Establishing and following rigid cash out procedures that verify that the starting cash plus the receipts (printed from the register) for the day equal the ending cash.
Verify that the cash deposits equal cash receipts.
Personally investigate customer complaints of receiving incorrect change.

Inventory or equipment theft

Is your inventory or equipment “walking out the back door”?

Prevention includes:
Keeping a record of company owned equipment, including serial numbers.
Tag all company owned equipment.
Keeping a record of inventory, including incoming and usage.
Verify inventory levels with periodic physical inventory counts.
Be suspicious of inventory shortages, or higher than normal inventory purchases.

Intellectual Property Theft

Could a disgruntled employee walk out with valuable intellectual property, such as secret formulas or customer lists? Your business could suffer dramatically if such information were to get into the hands of competitors.
Prevention includes:
Having all employees sign appropriate agreements relating to your intellectual property.
Having a clear written policy (in the employee manual) about company intellectual property.

2. Unplanned growth

Rapid growth of a business may seem to be a wonderful thing, and often is. However, unplanned growth can be as devastating to business as planned growth can be good.

A business that suddenly receives an order that is, perhaps, equivalent to half the total sales of the prior year may have these challenges:
Can production, personnel, and infrastructure be ramped up quickly enough?
Can the product or service be delivered on time?
Can customer’s quality expectations be met?
Is there cash available to pay for material, employees, sub-contractors, etc.?
Will customer payment terms provide cash in a timely manner?
Is there a line of credit in place with the bank to supply needed cash?

Companies have often been forced out of business when overwhelmed by the cash flow challenges of sudden sales growth.

Here are some things you can do to prepare for sustainable growth:

Have a business plan that you periodically review and update.
Keep your eye on your financial statements, continually projecting cash flow and cash requirements.
Maintain constant contact with your banker.
Maintain a line of credit that can be tapped.
If a large sales opportunity presents itself, seriously consider whether: it is consistent with your business plan; it will enable continued sustainable growth (or is just an anomaly not likely to happen again); can be executed to meet customer expectations of delivery and quality; there will be sufficient cash available to execute the contract while continuing regular business activities.
When confronted with a large sales order try to get the customer to help finance through a down payment and progress payments. Negotiate favorable accounts receivable payment terms.
Be prepared to turn down business that is either not strategic or which, after careful analysis, will have a damaging effect on your business.

3. Catastrophic IT Failures

In the information age many businesses are totally reliant on their computer systems. A brief power outage or server down time is often more than just inconvenient. An extended loss of servers or other parts of the IT infrastructure can be catastrophic. Many businesses are so dependent upon their IT system that without it they can not process orders, support customers, and perform daily operations. An outage of just a few days has forced companies to shut their doors.

If you are heavily reliant on your IT systems, here are some things to consider:
Have redundant servers.
Back up data daily and verify that backup tapes (or other media) actually have the backed up data.
Store back ups in a secure fire proof location.
Have a redundant off-site system.
Contract with a service company that provides remote preventative maintenance on your systems.
Ensure that your service contracts include a suitable maximum response time, including rapid hardware replacement if needed.
Install and keep up to date appropriate firewalls, and anti-virus software.
Establish and enforce suitable Internet and e-mail use policies.
Ensure that all of your software is current and supported by the vendors/developers.
If you have custom software, ensure that: you have all applicable current source code, there is at least one person other than the developer who knows and understands the inner workings of the software.

4. Poor Record Keeping

One survey of businesses filing for bankruptcy reported that 58% of respondents did little or no record keeping. At a minimum keeping good records of sales, expenses, and debts is critical for business survival.

Of the surprising reasons for failure, this is probably the easiest and least expensive to prevent. Here are some things to do:

Set up an accounting system that will record all financial transactions. Using a system like Quick Books ensures that you will have a workable system.
Use the accounting system! Use it to write invoices, pay bills, and reconcile the bank statement. Print reports showing your cash balance, what your are owed by customers, and what you owe vendors.
If you have two or more employees, have a payroll service do your payroll. This will not only save work, but will ensure that payroll records are properly maintained and that taxes will be paid on time.
Create a financial projection for at least one year that shows how much money you expect to have come in each month, and how much money you expect to have go out. Use this to help guide your business decisions.
Have a professional (your accountant) review your financial records at least once a year.

5. Failure to seek and use advice

A business owner who goes entirely on his/her own without seeking and using external advice is much more likely to fail that owners who embrace the advice from outside advisors.

Here are some things to do:

Find professionals that you are comfortable with and whom you trust. These should include: a banker, attorney, accountant, and a general business advisor. Depending upon the nature of your business, and your own skills, you may want to seek out marketing, sales, or other advisors.
Seek opinions from your advisors any time you make a change in your business.
Keep in touch with your advisors. Don’t just contact them when you have a crisis.
Understand up front what costs will be incurred when dealing with your advisors.
Create a board of advisors, and meet with them at least quarterly.
Most important-when you have received advice, act on it in order to get the benefits of the advice.

While, as a business owner, you have the ability to control your own destiny, you need to make the right moves and right decisions in order to assure the sustainability of your business.