Any business that can imaginably be run from a home office should be, and this extends to financing. Despite all that's said about most failed businesses being under capitalized, don't go into debt unless you have to. Seek outside financing only if you must in order to start the business you want, and even then, spend time investigating whether there's a way to get into your field without incurring a financial obligation that may wind up driving your business (instead of you).
As an experienced newsletter editor thinking about going out on my own, I evaluated the prospects of starting a new publication, and realized that even if I could get the financing, I'd be risking not only all my efforts, personal savings and probably our family's home, but would be making payments to my lender well beyond the foreseeable future.
On the other hand, in pursuit of a customized consulting practice based on my particular knowledge of my markets, I was able to get started by borrowing only about $5000 on a home equity loan (in addition to about $5000 in personal savings). I paid off the $5000 with a retainer I received the month I opened, and have stayed in the black with a pay as you go approach ever since. The beauty of this is that I could still decide to launch a publication or participate in one. The fact that I haven't incurred debt frees me to pursue other projects if such opportunities present themselves down the road.
"Conventional financing for most home based businesses is minimal," says Gene Fairbrother, a consultant with Shoptalk 800, a toll free hotline service of the National Association for the Self Employed, a group based in Hurst, Texas, with 300,000 members.
Unfortunately, the need for financing typically runs well beyond the $10,000 I invested in starting up. While any kind of financing may be hard to get, or require personal collateral, even fewer lenders are willing to be bothered with loans of less than $25,000. However, a Small Business Administration "mi croloan" program that began in 1992 makes loans like this available to very small businesses and the SBA may advise you of other state and federal programs targeted to this need.
Most advisers agree that if you borrow money, borrow plenty. "If I had it to do over again, I'd have borrowed more . . . six months to a year's worth," says Janice Caldwell of Rockville, MD. Janice launched a law practice from her home in 1982 with two months' worth of capital. Since it takes a while to bring clients on board, she had to lean on relatives for financial help." I still haven't paid them back," she admits.
Similarly, Loretta Larimer says she wishes she'd had about $50,000 instead of the $3000 she started with when opening P&P Sewing in Janesville, CA. Loretta bought P&P, which sells and services sewing machines, for $3000 in 1990, but had nothing beyond that to invest in its growth. With an extra $47,000, what would she have done? Among other things, avoided borrowing small amounts at higher rates. "I'm in debt up to my ears," she says.
Where Money Comes From
About 75 percent of new businesses are funded by their owners; about 13 percent receive financing from outside investors and through strategic alliances; about 8 percent are backed by banks. In Chapter 9 (Getting Started), we'll go into detail about a variety of nontraditional sources of financing. But in general, and for the purposes of our discussion here, my advice is: Don't ignore nontraditional sources. More small businesses find money there than through banks.
But beware of borrowing from a friend or relative. About 10 percent of small business owners do so, according to the U.S. Census Bureau, and the results of a failed agreement can ruin a relationship. For those who do, it's best to put it in writing and pay a fair interest rate. (There are tax implications on each side here: write offs for the lender if the rate is below market and extra levees for you on any difference between what you're paying in interest and the going rate, since that amount is considered taxable income.)
Finally and this applies to any kind of lender be very cautious when offering snares of ownership to your lenders. You may be introducing a voice in managing the enterprise that you hadn't counted on. And, if you succeed, you'll wish you didn't have to share the reward.
According to George McDonald, commercial loan officer at Savings Bank of Walpole in southern New Hampshire, the picture will look something like this:
Whereas banks have traditionally cared most about collateral, today the name of the game is cash flow. Show cash flow in a new business and you can talk turkey. A bank will match whatever you're investing (but would invest up to 75 percent of what you need to buy an existing business; see Chapter 5).
To further qualify, George's advice is to:
Choose your bank carefully.
Some favor bigger businesses. A 1995 Federal Reserve System study found multi office banks often skimp on small business loans. Try to find a local decision maker for your loan.
Don't apply for an SBA loan at more than one bank.
It's a waste of time.
Fifty fifty partnerships don't work.
Just don't do it.
Get enough money the first time.
"Put a little cushion in there," says George. (Why does this sound like my banker talking?)
Make sure you need it.
"Every other person who seeks financing doesn't need it. Lack of working capital is just a symptom of an underlying problem," he says.
And Have You Considered...?
Numerous other issues are apt to jump up and grab you in the course of starting a new business. We'll grapple with several in more detail in Chapter 9, but I'll mention these now in case you need something else to keep you awake at night:
Are your personal finances sufficiently stable that they won't present an unreasonable burden on your new business? (How's that for a loaded question? Put down that new car ad!) Seriously, are you and your family prepared for the kinds of sacrifices that may be necessary to get your business airborne? Many of us can point to a time in our lives when we got by on next to nothing. Are you ready, if need be, to revisit those good old days?
Are most businesses in your area prospering? Or, if not in your area, in your market? Since "location is every thing," is yours ideal, both in terms of a proper setting for your work that reflects the image you seek to create, as well as in cost?
Is there equipment you could lease rather than buy, in order to minimize outlay?
Do you have adequate health, disability and liability insurance?
Is your record keeping shipshape (and appropriate to the size of the enterprise)?
What happens if you're successful beyond your wildest dreams? It could happen.
Luckily, there's a limit. Even if you can't answer all of these questions, take heart. There really are only five things that can go wrong:
- You don't truly know what your objectives are.
- You failed to insure yourself against known risk.
- There's a great big hole in your financial plan.
- You don't really know this field.
- You procrastinate (I saved this one for last).
