Financing Your Home Business © 2002 Elena Fawkner
So, you have a great idea for a business and, more importantly,
know-how to bring it into creation. The only thing you’re missing is cold hard cash to get started. What are your options?
Assuming you don’t have a ready line of credit, an expansive bank manager, wealthy relatives or a substantial stash of retirement savings you’re willing to risk, you’re going to have to do some serious homework and legwork. Fortunately, there are a number of sources of finance for fledgling small business entrepreneur, at least one of which may be right for you.
SBA LOANS
Available only to U.S.-based businesses (but look for similar programs in your own country if you’re outside U.S.), SBA (the U.S. Small Business Administration) has assisted thousands of entrepreneurs start their own small businesses. The SBA doesn’t issue grants (money you don’t have to pay back) or make loans directly, rather, it guarantees loans made by private lenders thereby reducing or eliminating risk inherent in new business ventures and making lenders more willing to lend.
The primary consideration for SBA is repayment ability from cashflow of business as well as “good character, management capability, collateral and owner’s equity”. You will be expected to personally guarantee your loan. This means your personal assets are at risk.
As for types of businesses eligible for SBA loans, SBA imposes following criteria: business must be “for-profit” (all that means is that your business has a profit motive, not that it has actually generated a profit yet), be engaged in business in United States, there must be “reasonable” owner equity (what’s reasonable will depend on circumstances) and you are expected to use alternative financial resources first, including your own assets where practicable.
The SBA also imposes limitations on use of loan proceeds. For example, although proceeds can be used for most business purposes (the examples given by SBA include “the purchase of real estate to house business operations; construction, renovation or leasehold improvements; acquisition of furniture, fixtures, machinery and equipment; purchase of inventory; and working capital”), you can’t use loan proceeds for financing floor plan needs, to pay existing debt, to make payments to business owners or to pay delinquent taxes etc.
As a general rule, loans for working capital must be repaid within seven years and loans for fixed assets must be paid for by end of economic life of assets (but not to exceed 25 years).
Interest rates are negotiated between borrower and lender but SBA imposes maxima which are pegged to
Prime Rate.
Finally, SBA charges lenders a guaranty and servicing fee for each loan approved, and there is nothing preventing lender oncharging these fees to borrower. The guaranty fee for a loan of $150,000 or less is 2% of guaranteed amount; over $150,000 but below $700,000, it’s 3% and above $700,000 it’s 3.5%. The annual servicing fee is 0.5% which is calculated on then-current loan balance.
Where borrower meets SBA’s credit and eligibility requirements, it will guarantee up to $85% of loans $150,000 and less and up to 75% of loans above that amount (up to a maximum of $1,000,000).
For more information about various SBA loan programs, visit SBA website at http://www.sba.gov.
PRIVATE GRANTS
At present, there are no U.S. government grants offered for small business. If you're outside U.S. check with your own government about availability of small business grants. You never know!
Various corporate grantmakers make grants available for small business though. For more information, visit http://www.fdncenter.org/funders/grantmaker/index.html .
