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How To Finance A New Business
by Vanessa Ryan
Vanessa Ryan is a real estate broker, stock trader, and corporate recruiter.

You've made up your mind. You're too smart and too independent to keep working for someone else any longer. But how do you get from employee to business owner when you don't have a pile of money sitting in the bank?

Here's a hint: pick a business that requires equipment to produce its products. This kind of business is more attractive to lenders because the equipment can be used as collateral.

The next thing to do is to assess who you are. What are your personal strengths? What are your weaknesses? People who are successful in their own business are those who work hard, and know how to manage other people and the resources needed in the business, such as inventory or raw materials. They aren't afraid to promote their business to customers, or to anyone who might enhance their business. They know the value of advertising and budgeting. They also pay their bills. And above all, they have a plan of how they propose to succeed.

Am I describing you?

By now some of you may be saying, just tell me how to get the money, already. Well, there's no secret to getting the money. You either borrow it, get people to give it to you as an investment or as a grant, or use your savings--either from your bank or retirement accounts, or from tax refunds. The real secret is getting these resources to work for you because of your strengths.

Getting investors or corporate sponsors are complicated endeavors. I don't recommend this for those just starting out. Neither do I recommend using the equity in your home to fund a
business, because in today's declining real estate market you probably don't have much equity. And certainly, if you rent you don't have any. Aside from savings, family, and friends, the other remaining options for starting a new business are getting loans from equipment leasing companies and the SBA Microloan Program. The Microloan Program is designed for new businesses but is limited to a maximum of $50,000, with the average loan being about $10,000.

One equipment-driven business that has become a money-maker is creating and selling ice sculptures. These have become popular fixtures at large parties and events across the country. There's a company in Los Angeles that sells the ice-carving equipment for $65,000, plus shipping. That requires more money than you could get from the Microloan Program, so you if you want to start this business you would need to apply to an equipment leasing company. But unlike a car lease, at the end of the lease you will end up owning the equipment.

Although most equipment leasing companies will not fund startups, I have found one that will--provided your strengths make sense to its underwriters. But just like any other lender, they going to make you go through some hoops to get this money. The first thing they will do is run your credit. You should not have any bankruptcies or charge-offs and your FICO score should be at least 675. They will still fund your deal if you have at least a 640 FICO, but they will want some explanation as to why your score is so low. The lower your score, the more documentation they will require. Your last two years tax returns, current pay stubs, and the last three bank statements are some of the items they will want to review. They will check to see that you do not have a history of bounced checks and that you have made a regular income well above the poverty level. And here's the surprise: they will also want to see that you have some money left in your accounts at the end of the month for working capital--money you will need for advertising and promotion, phone and Internet service, transportation and vehicle maintenance, part-time employees to help you set up at parties, and money to make the lease payments.

That's right. You're going to need some money to get the business going, over and above the cost of the equipment. And guess what? They aren't going to lend it to you. So where do you get it?

Obviously, if you have savings, that's a good place to start. Maybe you manage to scrape together $8,000 from your savings and by persuading a friend or two to lend you some of it. Or maybe you have only $4,000. You can apply for a Microloan from the SBA for additional working capital. But both the SBA and the leasing company will want to see that you have some of your own funds in this venture. If you're not willing to put up some of your own money, why should they?

Furthermore, the leasing company will be reluctant to lend you the money if you borrow your working capital--they'll see you as over-extended. They know most new businesses fail within the first few years and they don't want to get stuck with the equipment. Notice I did not mention credit cards as a source of funds. The interest rates are too high, and no one will lend you money when you've maxed out your cards.

If this sounds like a Catch-22, it is. Nobody said it was going to be easy. But it can be done. If you're going to start a business you need to save money for working capital. Or find a partner with some. But if your partner has bad credit, he or she needs to be a silent partner. Everyone listed as an owner in the business will have to go through the same hoops as you.

The next thing a lender is going to want to know is what makes you think you can make money in this business? The Microloan Program will require a full-blown business plan. You may need to take a course in how to write one. The equipment leasing company will want you to submit at least a mission statement. This statement should be a mini-business plan, listing your strengths, experience, the amount of working capital you have, your sales projections, and where you want this business to be in five years.

Maybe one of your strengths is that you have worked for a caterer as a server, or as a cook. Or maybe you've done charity work and coordinated an event for your church or group. Along with this experience, you can also show a list of potential buyers for your ice sculptures. Additionally, you explain that your computer skills are all that's necessary in the carving of these sculptures because the equipment comes with software that automatically designs the sculptures, creating a perfect sculpture every time. The equipment also includes a box for transporting and displaying the sculptures, as well as a means to dispose of the ice once the party is over.

Another one of your strengths is that your house has a garage, because the equipment takes up a ten by ten foot space. Having your own garage will save you the cost of renting office space. Because the sculptures this equipment makes are small enough to carry in the back seat of your car, you won't need to buy a van to get started in this business.

The underwriters in the leasing company will weigh whether your strengths, credit, and income producing ability merit the funding of this lease. They want to assure the leasing company that you have the ability to make the payments. It is up to you to convince them that you can get your business started and keep it going until the business supports itself through sales.

Who you are and what you have accomplished is very important to them. Who would you rather lend money to for an ice sculpture business: a person who had worked in the catering business with a history of making a good income and paying her bills on time, or someone who had worked as a payroll clerk in an auto supply store, with a history of being overdrawn on her checking account?

This is not to say that people with employment histories in industries unrelated to the business they want to start could not get an equipment lease or a Microloan, but they would have to explain why their experience or their abilities would be an asset in the business they want to start. For example, this same leasing company turned down an applicant who wanted to purchase equipment for $350,000 to start a manufacturing business. He had a FICO score of 850 and $200,000 in the bank for working capital. But he had no experience in this business and the lender turned him down. It was too big a risk.

To sum up, credit and working capital are important factors in getting financing for your business, but the human factor--your experience and your drive to succeed--is equally important. The whole picture must make sense to a lender. With careful planning and saving, as well as obtaining some related skills in your chosen business, you will make that leap from employee to business owner.

Published: Jul 14,2008 17:46
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