Your biggest hurdle in starting a small business will most likely be coming up with the money you need in order to establish and maintain your company’s operations. Coming up with this money, or capital, is crucial to the success of your new business.
If you do not personally have the capital you need to start your business, and cannot borrow it from a family member or friend, there are a number of financing options.
Though many venture capitalists are hesitant to invest in start-up companies, they will often invest if they like the future prospects for the company. Venture capitalists look to invest for a short period of time, usually 3 to 5 years. They can be a great source of capital, but often want to play a role in the oversight or management of the companies they invest in, which may or may not interest you as the business owner.
Commercial loans are often appealing when you start up your business because, unlike venture capitalists, the bank will not try and play an active role in the company’s affairs. If, as the business owner, you have a substantial number of personal assets, you may have no problem qualifying for a commercial loan for your business. Because banks tend to look to past performance, however, instead of the company’s potential, it is more challenging for a start-up company to get a commercial loan.
Asset based financing is gaining popularity as a means of financing small businesses. Here, the lender will accept assets of the new company, such as accounts receivable, as collateral for the loan.
There are a number of state and federal loan organizations that are designed to promote new business growth. These organizations may fund new businesses directly or may serve as a liaison between you and a lender.
The SBA is one such government organization that can assist you in securing loans for the capital you need to get your business up and running. The SBA does not loan out any money directly. Instead, it assumes the risk of a borrower’s non-payment, thus making private lenders willing to loan money to new business borrowers. In order to obtain SBA’s assistance, a small business must prove that:
- conventional financing is not available to the business on reasonable terms (interest rates too high, etc.);
- there is a reasonable assurance that the business will be able to repay the loan;
- the loan is for an appropriate business purpose
Lawyers often play a crucial role in the lending process. A business attorney with experience in business can aid in negations with lenders and preparation of documents, as well as anticipate and alleviate any potential conflicts with your lender.