Q: Since I probably won't be able to
get a bank loan or line of credit to start my new micro-business, what other
sources of financing are available to me?
A: I hope you're not writing off a
bank loan before you try. Banks have been trying hard in recent
years to become friends of the small business sector. Among the
factors they will consider before giving you a start-up loan are:
size of business, ability to service debt, the strength of your
personal guarantee or other security, your debt to equity ratio, the
credibility of your income and expense projections, and your
management experience.
Any lender or investor will also expect you to
invest in your own business. This can include personal savings and
so-called sweat equity, which is your investment of time and
labor.
Another important source of start-up capital is
individuals who are often called angels. These are simply
wealthy individuals who invest amounts up to $100,000 in small
companies. Most angels do not want to control your company, but they
want equity and they usually require high returns. Most will insist
on a formal shareholders agreement and input into major
management decisions.
Friends and relatives often invest in
businesses owned by family members, associates and friends. This
so-called love money carries implications for your personal
relationships and can be quite emotional.
Suppliers and customers are an indirect source
of capital. Careful management of the balance between current
accounts receivable and accounts payable can liberate your cash
flow. You may be also able to negotiate with suppliers for increased
discounts and better terms. In addition, financial intermediaries
called factors will allow you to convert your receivables into
capital.
You should also consider leasing as an
alternative to debt. Some very small start-up companies use credit
cards as a way of obtaining small scale debt capital. Be cautious,
though, because while convenient, credit cards bear relatively high
rates of interest.
