 |
|
|
FINANCIAL PLANNING |
|
|
PERSPECTIVES |
|
|
Financial Alternatives for
small businesses
| January 2005 |
|
Whether starting up a small business or expanding an
existing company, you almost certainly will need financing.
But which option or combination of financing options:
personal savings, friends and family, commercial or
government loans, outside investors? Which options will most
likely be available to you and what are their pros and cons?
Before choosing financing options, however, determine how
much money you’ll need. That entails developing a good
business plan, which benefits not only you but will be de
rigueur for most financing arrangements. Books, Web sources,
software, and classes are available on how to write a good
plan.
Don’t be too conservative estimating the amount of financing
you need. Undercapitalization leads to a third of all
bankruptcy filings for small businesses, according to the
federal Small Business Administration. Some experts
recommend estimating a realistic amount and then adding 10
percent to it just to be sure you didn’t overlook anything.
Others suggest having enough funds in reserve to pay your
personal living expenses for at least one year so as not to
put a drag on your new business cash flow.
Personal savings. The nice thing about this option is that
no one will turn you down. Of course, you may not have
sufficient savings or you may not want to risk your personal
savings (some financing options may compel you to, anyway).
Borrow from family or friends. This is a popular
choice when you can’t get standard financing. Still, it can
come with great peril because of the emotional bond for both
parties. Expect some strained times if things go sour, so be
sure everyone thoroughly understands upfront the risks of
their loan. Show them your business plan and put the loan in
writing.
Put in on plastic. Credit cards are easy to get and
you don’t give up control or have relatives or friends
peering over your shoulder. But plastic can be expensive and
risky borrowing, especially if you fall
behind on your payments. That’s why business experts often
recommend limiting the use of cards for smaller, temporary
cash needs you can pay back more easily, while using other
financing for larger, longer-term expenses.
Commercial loans. Bank loans are often desirable
because rates can be among the lowest and a bank loan can
make you look good to other lenders. The problem is that
many small businesses have a tough time getting bank loans
because banks are pretty conservative lenders. You’ll need
to show them a solid business plan, a good personal credit
rating, and prospects for steady cash flow. You may be asked
to guarantee the loan with personal assets—something not all
entrepreneurs are willing to do.
Shop around. Banks have different lending standards and one
may lend where another won’t.
Personal loans. Personal loans from banks are easier
to get and often don’t require collateral. But interest
rates are likely to be double or even triple a commercial
loan rate and lenders may balk at using the loan for a small
business. Some finance their business with a home-equity
loan, but that puts your home at risk.
Federally-backed loans. The federal Small Business
Administration (www.sba.gov) provides an array of loan
options through private lenders (shop around). The main
program is called 7(a), which provides funding for start-ups
or existing businesses for everything from land to equipment
to working capital. A micro-loan program ($35,000 or less)
is available for small firms employing five or fewer,
particularly firms with minority, low-income, or disabled
owners.
Equity partners. Bringing in other investors is an
option many small-business owners are loath to do, but may
have to out of necessity. Financing options from private
investors can be complicated and you’ll likely want
assistance from an attorney experienced in this area.
The advantage of equity partners is that with a good plan
and a promising business you may be able to bring in
much-needed cash for a venture that lenders might shun
because of high risk or lack of stable cash flow.
The downsides are that you dilute ownership, investors are
likely to offer lots of advice and criticism, and the
process of lining up investors can take much longer than
other forms of financing.
Each of these financing options has their pros and cons, so
it’s critical to develop upfront a detailed, well-conceived
business plan in order to determine your best funding
options.
|
|
|
|
(This column is produced by the Financial Planning Association, the
membership organization for the financial planning community, and is
provided by Fredrick J. Livingston, CFP®, Planmark Capital
Management, LLC and he is a Registered Principal with, and offers
securities through, Linsco/Private Ledger, Member NASD/SIPC.)
The opinions voiced in this material are for general information
only and are not intended to provide specific advice or
recommendations for any individual. To determine which investment(s)
may be appropriate for you, consult with your attorney, accountant,
financial advisor, or tax advisor prior to investing.
All performance referenced is historical. All indexes are unmanaged
and cannot be invested into directly.
|
|
|
Home 
