Show Me the Money, Part I

In the first of a two-part series on funding your startup, our columnist gives the lowdown on loans, equity investment, and grants

By Christine Comaford

Getting access to funding when you need it is essential to both emerging and established businesses. So where can you find it? There are far more sources—which are far more accessible—than you may have imagined.

In addition to maxing out my credit cards (yep, I admit it), I've funded my own startups in a lot of ways: I factored invoices (sometimes), used a bank credit line (constantly), and took venture capital (once—and then I started my own fund). Your capital acquisition strategy may include a combination of funding sources (see BusinessWeek.com, 1/22/07, "Rules for Raising Capital"). It's smart to diversify, and a blend of debt, equity, and possibly grants is a great idea. Let's look at debt-based financing first.

Bank and SBA Loans

Upside: Debt only

Downside: Can be hard to get; excessive paperwork

Banks Determine which bank in your community understands the type of company you have. Every six months or so, ask for an increase on your credit-card limit and on your line of credit. Each small increment is worth something.

SBA loans The Small Business Administration's (www.sba.gov) loans are federally guaranteed by the government and must be repaid. The lender is insured against a total loss, typically receiving 75% of the loan amount even if the borrower defaults. Therefore they're more likely to do riskier deals, which is good news for businesses with fewer than three years of operation.

SBA loans have eligibility guidelines. For instance, your company has to be for-profit, operate in the U.S., and be majority-owned by a U.S. citizen or permanent resident. The SBA will consider your cash flow, your detailed business plan that includes your exit strategy, two-year (or more) detailed monthly financial projections showing an upward revenue trend for your business, plus past tax returns (if you have any—this doesn't apply to brand new companies).

Every year, the SBA will want to see improved revenues and decreased debt. If revenues are cyclical, that's O.K., as long as they can see that your expenses have taken into account revenue fluctuations, and profitability targets remain stable. The bottom line is if you have cash flow and assets for collateral, you will likely get a loan from the SBA. If not, they probably won't take the risk. Again, this is yet another reason to have a solid relationship with your banker, who will help you fill out the extensive SBA loan paperwork and can serve as a co-lender, too.