Insufficient capitalization at business start up is one of the most common reasons for any business to fail before it really starts going. No matter how much planning you do starting a business is similar to going to university for the first time or moving into a new home – there’s all kinds of hidden fees, unexpected costs and significant strains on your cash flow. So, having enough money in the bank to both cover the planned and unplanned financial commitments is critical giving your new business the best chance at getting an A-grade.
There are a variety of different sources of financing including personal savings, leveraging asset equity (i.e. a variety of “home plan” credit products), “love money” from friends and family, investor equity through shares sold in a corporate structure and traditional small business loans. Each source has its own unique set of advantages, disadvantages and expectations. First and foremost, regardless of where you seek capital for start-up, there will be an expectation that you invest some of your own personal equity into the business. The bottom lines here are that if you are not willing or able to invest your own money then why should anyone else do the same; and, if you cannot or will not invest your own money into the business then you are essentially asking others to take 100% of the risk with you reaping most of the rewards.
Love money tends to be much more forgiving than other sources of financing in terms of both interest rates and repayment terms. However, such financial arrangements can often put a strain on personal relationships that can, at the very least, lead to some very awkward holiday dinners and an expectation of future quid pro quo. Setting up your business as a corporate entity allows you to sell shares in the business in exchange for future value of the business’ returns to interested investors. Of course, when you sell shares of your business you also forfeit a portion of your decision making autonomy as well as, typically, higher “interest” rates paid back to investors in the forms of dividends and lost appreciation of net value based on an assumption of that your business successfully accumulates assets.
Typically the simplest form of small business financing with the least “strings attached” is a small business loan. Unfortunately, most banks are reluctant to lend to business start ups due to a variety of reasons; not the least of which being the high failure rate of new small businesses. This is where Community Futures can help.
As with any financial institution Community Futures will look at your business plan, your personal credit history and the potential for the loan to be repaid. However, if you can demonstrate with confidence that there is a market for your product or service and have a reasonable (or reasonably explainable credit history – since not everyone has a “squeaky clean” credit record – but there are often legitimate reasons for this such as previous spousal issues) and if you are willing to put up some of your own money into the venture then Community Futures is very interested in helping an individual or partners start-up their business.
Unlike other traditional lenders small business financing decisions at Community Futures are ultimately made by a volunteer financing committee. This committee is made of members who live and work in our communities, have experience in small business, and have a genuine appreciation and understanding for not only the challenges of small business but also the tremendously positive impact they have towards stabilizing and diversifying our economy. While the bottom line question that must be answered by any loan application is: “will this loan be paid back?” the Committee gives serious weight to the applicant’s demonstrated work ethic and commitment to the prospective business and their community.
If you are in a position of wanting to turn your entrepreneurial dreams into reality – whether as a start up business or as a business ready to grow – then please inquire about the Community Futures small business financing program. Be prepared to work with us as we are prepared to work with you!