Top 20 Small Business Financing Tips
How to Find Small Business Loans or Investors

All about Small Business Financing
Avoiding Business Funding Scams
How to Get Investors or Loans

Finding small business financing-funding is difficult, especially for a new business. There are several ways to get real funding, but you have to be innovative and knowledgeable and avoid over-priced or risky financing or investing deals.

Don't fall for financing scams that sound great but mostly put you and your company at risk. There are many con artists claiming to aid small businesses to get SBA or other loans and government grants. Many do not disclose that they are seldom if ever successful in getting you a loan when taking fees of $1000 or more. Consider our helpful informatoin tips to guide your search for loans or financing:

NOTE: See Disclaimer below. Any use of this information is at your own risk. Not intended for primary decision-making. Do your own due diligence and study to confirm what you do.

First, be sure you have a good business and high-demand product with real sales. Otherwise you will just get deeper in trouble and everything will get worse. Every lender or investor is due honest disclosure of outlook of your business. Otherwise you are defrauding them. Be sure your business is grounded on sound business competitive advantages and efficiencies offering unique selling propositions. Think and study about business: Learn the basics of positioning, differentiation, focus, strategies, pricing strategy, distribution channels and the importance of uniqueness, exclusiveness, unique selling proposition (what is your elevator pitch?), and competitive advantage. Real business is selling unique items in high demand to buyers with sources of funds. Will people readily pay for your product/service? (But remember the old saying "Sell to mass, live with the class". That is the masses usually spend everything they get).

Know what is necessary to pay back lenders or investors: First, make sure you can pay the money back. Even if your business, product or idea is good, be sure you are a competent manager and can run it with serious debt or investor obligation. Whether loans or investors, these people expect to get a good return on their money. If you hope to do the same with your efforts and time, you better be a really good manager with a good scalable business. It must grow and support debt and expectations of investors. You have to have at least 35% margins (54% markup) turned four times per year to greatly benefit from debt at reasonable rates, such as 8% annual interest. Usually only vendors-suppliers give those kinds of rates. New small businesses pay more than that to banks IF they could get a loan which will be based on the owners credit rating. NEVER misrepresent to a bank unless you want 20 years in prison (some of the highest sentences).

Most investors or "angels" are out of the question for average small businesses with nothing unique, only a "me too" service or small operation based only on your personal skills. They want a major product or service capable of millions in sales with high margins within 3 years. If you don't have a great unique product or are not a good manager, good with people, able to motivate, coach, organize, inspire and direct, you are probably stuck with just you and few helpers. Perhaps you can outsource part of your service to others who can manage, but that gets expensive taking the profit you could have used to pay debt interest.

Realize that there is a big difference between you and two good helpers than having several employees or crews working. But worst is having two or three more crews and you losing control and over-sight if you are too busy working and not mostly managing. Most help nowadays is prone to trouble and mistakes. One worker out of six will likely damage your quality and reputation, or be doing drugs or have an accident costing you money especially if you are sued (master is liable for servant acts). If your business is you and a couple helpers, realize you should stick to one or two crews or a small operation, or jump to about a 5 or 6 times larger well-managed operation to justify your transition to mostly constant oversight, marketing and sales. Have you ever managed over 20 people or contractors? Are you good at selling? Can you afford insurance? Any financing or investor plan must be based on that size of operation (or just great sales), except in exceptional cases. Increasing size of operations and sales can be hazardous. Margins and pricing have to be higher for a bigger business than two or three people to cover more overhead and risks.

If your business has not run for at least a year, you probably don't have a realistic idea of its potential and operating demands. Therefore you can not properly project what it will do with more money. You don't seek loans without an end game of success in sight. You can't borrow money to just delay failure. That will only get ugly. You must have a viable clear and realistic outlook and projections to profit and pay back the debt.

If you are just starting up a business, you must learn more about good management and accounting than you think, if you intend to utilize other's money. If you are technical, remember that marketing and sales have priority over everything except timely delivery of quality product or service. Those are just part of customer service, part of marketing and selling.

The very best financing methods is self-financing by great margins and steady strong growth of sales. Marketing and demand are keys to that. But beware of too-rapid growth; that is also hazardous.

Be sure your business meets demands in the market for what people really want, need or use, preferably somewhat unique and in a steady but growing field. When you have considered all the factors above and if you still are sure you can pull this off, you might proceed:

Top 20 Small Business Financing Tips:

1) Decide whether you can run a real and larger business: As above described, consider how you can best use the financing and whether you will operate slightly larger, such as one more helper and a bit of contracting out of work, or whether you will go to a much larger model with you mostly managing and selling to support that larger staffing. Know your market, whether it is strong and growing.

2) Consider alternatives to financing: Review what you can do to cut costs and increase sales instead of borrowing or taking on investors or partners. Realize that partners or investors are trouble and demanding. Angel investors expect at least 20% annual return when they cash out in three years or so. They won't give you much cash, but perhaps co-sign with all kinds of milestones and over-sight over you, your operation and your books. The underlying motive of most is to take most of your business away from you. Partners are even more trouble because they want to run the business and can obligate you to liabilities. Corporate investors can be of benefit in some cases, but you can not advertise for investors unless they participate some. (Ask a lawyer) Trouble is getting investors takes time, disclosures and expensive paperwork. The amount has to be large enough to justify that, such as at least $100,000. Loans, grants and loan guarantees are among the best ways to go. How much money you want, versus what you really need are two different things. On the other hand, you should get a little more than you think you absolutely need, for contingencies, safety margin and a little flexibility.

3) Study how you could best improve your business: Obviously how you can best use the money matters. Draw up some alternative scenarios and run spreadsheet projections. Be realistic, pessimistic and conservative. Assume a recession continues.

Analyze the company's main Strengths, Weaknesses, Opportunities and Threats (SWOT). Look for market gaps. Know what features sell so yuo can differentiate your company and product. Study basic business, positioning and strategy. Read some of our other business web sites, such as Web Success. Your business strategy decisions are the most important thing you will do next to deciding the above level of expansion and whether you will change role to manager/chief salesperson/accountant, or whether you will merely be the main worker.

4) Best Sources of Funding: Only after you have covered all the above should you now seek and consider the best sources of funding for the business strategy and role you have chosen. There are individuals who simply like to help out small businesses, among angel investors. Likewise there are those who like to loan their money out for about 12-15% annual interest. Understand that you can not advertise for investors who are passive, not participating in management. You can not promise a return for money passively invested as equity or ownership. Only registered security dealers can advertise passive investments. You can only advertise for "partner" or corporate partner to finance, implying that they participate in management and some part of operations, such as quarterly reviews. Talk to a business lawyer about this. To get investors there are ways to hold a seminar about your industry, and have disclosure and prospectus at the back of the room, not asking for investment up front. Investors must be referred or you already know them before bringing up the offering, or they have to be "high net worth" or a company. You might talk a security dealer friend to help you sell stock or a few investors could have a separate investment pool like an investment club.

5) Using Companies and Suppliers: Some of the best ways to get financing are to leverage the financial clout of suppliers to fund or finance your inventory or production equipment. There are deals for used but recent production equipment on a lease-purchase basis. The nice thing about those are that your credit record is not so critical to them. They will just take back the equipment if you can't pay. Interest rates on this are also lower, even near cost. This is appropriate for manufacturers.

Another method is to use supplier financing for inventory, known as "floor planning" your inventory. Likewise they will take your inventory if you can't pay. This type is appropriate for dealers of products. You might even convince some companies to take a small position or loan you money, if you are a supplier to them, or you buy their services, such as a local packaging company or material handling company. Three or four $2000 loans can go a long way toward cash flow solutions.

6) Individual's Loans: These are short term loans much less than one year. (They can be renewable). The money can not be used for capital purchases, nor stock issued to the lender (except as convertible debentures; talk to a securities lawyer-this is usually for larger small businesses and larger loans, and may be regulated).

These short-term operating loans are an interesting area because short term loans are not as regulated as securities or stock offerings (in most areas, check your local laws), as long as you are honest and disclose the risks. Fraud laws are strict however, so never misrepresent anything! Getting loans from individuals can be a good alternative. Don't be temped to borrow more than you can pay back. Interest rates are usually better than angel investor expectations. Also individuals usually will not try to tell you how to run the company. You should make that clear, that you will listen to ideas, but that you run the company. Be sure to disclose risks with a disclosure statement.

You can improve your chances of a loan greatly by insuring the loan. That will cost you a fair amount, but then you can pay a lower interest, such as 10% versus 16%. A few cooperative small business groups may bond or partially guarantee a loan as a joint bonding group, much like a business version of a credit union. Be honest and don't bilk a lending or bonding group, or your future in business will be dim. Small businesses who are bilked by you will make sure everyone knows your failure. The principles here for getting financing are like what you learned in kindergarten. Treat people the way you would like to be treated. Try to keep your word. Make honest conservative projections. Work hard. Be honest. (ie: Follow the golden rule.). If you default, pay back all you can, and try to pay the rest later. Most people accept business hardships or failures, but they expect you to do your best. Oh, and never take advantage of people who can't afford it, or who are old or not too sharp.

7) Consider securitizing the above loan by collateral of an interest in inventory, business property or part of the business itself,---if necessary to attract lenders. This is tricky because it might implicate securities laws if the loans exceed 9 months. Consult with a knowledgeable business attorney before you try this. This approach is similar to what all banks want, security for the loan. A few banks may be an alternative on these kinds of loans. You likely have to build up by starting with a CD secured loan for 90 days for about $5000. That costs you nothing but about 5% interest or $250 to establish a relationship. Ask around and find out which bank does more small business lending.

8) Allow enough time: If your business is new, don't expect to get loans, and don't expect your business to be profitable as soon as you would like. Most businesses take at least about two years before they are profitable, in good economic times. So don't be promising to pay out of your profit projections of the first year when you are first starting up.

9) A start up business usually must either get investors or loans from friends and family. Remember, investment requires that you give up some equity ownership, or at least is combined into the terms of co-signing a loan. Other than family or friends, usually only rich individuals or angel investors experienced in small business will venture any funds or co-signing of loans in exchange for equity and agreement to turn over more equity or all of the company if you default. Again, the business concept has to be excellent for these kinds of loans or investments.

10) Utilize co-signing where possible to enhance the credit prospects. This is a technique used to enhance credit rating by adding and utilizing others' credit capacity. Realize that you put the co-signer at risk in case you fail to pay, so be honest and conservative about who you might hurt if you fail to pay. You've heard the old wise sayings that loans often ruin friendships when someone can't pay. Many knowledgeable investors also will not hand you cash, but insist on simply adding their ROI "return on investment" expectations to a bank guarantee by co-signing for a note from a bank. Some do this to have control, to gain control, or force you into a situation to give up your company to them. This kind of burden will take most of the profits of a good start up business for the first three years. Don't expect to pay yourself much, if anything. These are the kinds of "concessions" that most investors insist upon. Essentially their loans or promises get converted to equity. Be ready to perform and jump through hoops. Have insurance to protect lenders.

11) Consider buying an existing running business for low money down owner financing. Check our tips for buying a business or income opportunity. Be sure you plan transition. Many businesses require the special skills and contacts/relationships of an owner. Transition is usually like a partnership, then the owner retires. But avoid real partnerships. Be careful to have a hold harmless agreement that you will not be liable until the owner moves out of the scene. This approach can establish credibility in the business community and banking much more quickly than starting your own business if you don't have good credit and substantial personal savings.

12) Consider getting investors. Funding is loans. Investors are part owners, but avoid their complete control of the business. Consult a lawyer. For these, you need someone knowledgeable in "boutique investment banking" or an "angel network" of angel investors. Be careful to abide by securities laws, to not offer "blue sky" promises of passive income from an investment. That is illegal. The most important aspect of investment capital or loan raising is disclosure. Be completely honest. It is illegal to advertise for passive investors who are not "high net worth individuals".

But if you have a really good idea, get people to sign non-disclosure, non-compete agreements before you disclose it. Consult with experts. The only legal advertising you can do is for partners, with a statement of the investment required. Term them a "corporate partner". But avoid partnerships rather than a small corporation or LLC. Talk to a good business lawyer about organization. An LLC can be OK, but the partnership agreement there is expensive on legal fees to have written. A good lawyer can find a good alternative for you. Try to keep the number of investors very small, one or two. Otherwise, consider a larger formal offering to raise substantial funds of over a million dollars. This will require a securities lawyer who consults to boutique investment bankers. Expect roughly $8,000-20,000 in legal fees plus 10% of the money raised to the investment banker. Expect to be scrutinized. You will be screened and your deal will have to be outstanding, a real major concept. That's not likely, so don't try unless you meet the standards and love paperwork, strict accounting and scrutiny. Again they expect at least 20% ROI per year, and to be out in 3 years. This is for major "players", not amateurs to deal with this process and win in the end.

13) Consider a small corporate, LLC type partnership or strategic alliance, like an LLC, with a close knit small group of like-minded friends on the same wavelength. But be wary and careful of partnerships. Their mistakes are yours and their debts are yours. Consult a good business lawyer and books on the subject. A cooperative strategic alliance might be good, each helping the other periodically. A serious problem with any corporation or LLC is that legal problems require that a lawyer be hired for its problems. Only a sole proprietor (or possibly a small partnership) can represent him/her self "pro se". Realize that making money usually takes money, at least a few thousand dollars, usually not less than $10,000 to start. An advantage is that you can exchange agreed special expertise, concepts, licenses, contracts, etc. in place of cash as a part of the business. A small group of friends can bring in a few more friends on a small corporation, giving easy understanding of the organization and easy accounting and liquidation of shares. But you still should consult a good lawyer.

14) Look at innovative ways to do a deal: Simple concepts or arrangements work best. Concepts like lease-purchase are easy for everyone to understand. For example, you might even lease purchase half or more of the business from a lender. He/she becomes the seller of the investment, possibly eliminating some of the securities issues.(You should consult a lawyer).

You could arrange a partial release, as to percentage paid on that, as part of the lease purchase agreement. Another way is a similar concept the 80/20 method. You bring the idea, work and most of the management-they bring the money. They own 80% of the business and get 80% of the profits until their investment is returned, at which time the percentages flip. Then you get 80% of the profits and of the business and they continue to get 20% for the life of the business. (That is a sweet arrangement). Another cool method is similar to how some smaller oil exploration deals are done, such as with 4 investor partners in an LP, a limited partnership. That is a security so you must either know the investors or have a security dealer set it up. But you might find another way. In this you bring the expertise and idea and labor, and about 4 others bring the money. You each get 20% or 1/5th of the deal. That is known as "a fourth for a fifth". Each is converting 5% of their 25% over to you for your participation. When the company makes a 25% return, they have received your part back. You all share equally thereafter, but you keep running it unless they agree otherwise to gradually exit or participate. You could look at other ways, such as the investor owns it all and leases the company to you cheaply for a while, then you buy it out, or buy part of it. These are concepts most average people can grasp.

You'd be surprised how a sincere ad in a newspaper or equivalent can bring in someone who wants to invest in a business. Just be sure to do it legally. Offer them two ways to do the deal. They are investing in you and your ability. Remind them that together you might really prosper far beyond a money market or average stock.

15) Consider an internet-based stock offering, but be careful: State and Federal Securities and fraud laws apply. Penalties are stiff, including prison time if you ignore them. There is a state Form for a small exempt offering, usually under $1 million and with a limited number of investors. Disclosure is strict, and the offering must be recorded (filed). Expect to disclose all relevant information about your history and finances. Restrictions may apply as to type of investor, as to their sophistication and/or net worth, usually over $1.2 million in net worth. You should seek the advice of a specialist in this field. Expect to do serious audited accounting and to be subject to a board of directors and fiduciary duties.

16) Think local and work in your area or state. Few lenders or investors will invest or loan outside their local area of about 50 miles radius. A bigger project may bring investors from throughout the state. Typically there will have to be at least two or three meetings to finalize a deal so travel and time is important. Mainly the issue is that people want to deal with local people and know where to find you and be able to drop in and see their money in action.

17) Consider using the internet as a medium to locate lenders or investor partners. Follow basic web site design rules and design to the audience you are seeking. The disadvantage here is that you might disclose too much of your concept before you get an inquiry. Be careful not to disclose key innovative points until someone is screened as to ability and interest, and willing to sign a non-disclosure non-compete. As in #16 above, focus your web site or posting efforts into a local or state area campaign, promoting only locally. Post your needs to some forums. Expect a lot of junk mail.

CROWD FUNDING - NOTE: This is one reason CrowdFunding has some disadvantages. Read up on it. The important protections of dealing confidentially with one or two big investors is that normal crowd fundings give away too much proprietary information on the internet. If you hae a REALLY good idea that investors might really be interested in helping, if you've run to the internet touting it all over for a year, most investors will NOT be interested any more.

18) Local credit unions and commercial oriented local banks may lend to you if you have inventory or property as collateral to secure the loan. Establish a banking relationship before-hand and get your business accounting records and plans together and up to date. Utilize a business plan builder software program and do realistic cash flow projections.

19) Accounts receivable factoring: Most of these are a waste of time and energy, trying to bait you into a long contract for merchant credit card services. The word out is that new privacy rules require their inspection of your premises if you handle credit card paperwork. The discounts you have to give to get the 92% or so of receivables advanced only the 20 days that you gain is hardly worth giving away half your profits. Adding the other fees, when there are other credit alternatives is probably a waste of time and money.

20) SBA and Local Economic Development Agencies: These loan guarantee programs are under-funded and typically very hard to get, very bureaucratic and a waste of time, requiring tons of paperwork and are traditionally oriented to minorities (who is that now?) and females. They require that you already recently have had the same loan proposal turned down by banks, so then the SBA may guarantee a portion, such as 80% of your loan from an SBA partnering bank focused on small business lending. Many consultants promise for a couple of thousand dollars to help you get an SBA loan. Don't be too sure and ask for references of recent loan recipients. Economic development agencies have similar requirements, but they favor big projects that create taxes and employment. They favor processing and manufacturing plant projects that hire scores of workers. They favor expansions also. These are county and state agencies. You have to remember, this is your government at work and it doesn't work very well, as usual. The SBA is a token program that was set up to appease minorities. The funding is miniscule compared to demand, and big corporate business that influence our governments don't really want competition from growing small businesses, nor want strong employment... It's probably a waste of time.

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There is no free lunch. Using other people's money is difficult, risky, costly, a major hassle. Your company must realistically return about 80% or more on working capital per year to service this kind of debt and pay you and your helpers anything, and allow growth of inventory or operations. With 40% margins (80% markup) and 20% net net income, that is four turns of all your inventory per year. A service business likewise would have to do at least 80% markup continuously with constant sales. This allows nothing for returns, repairs and warranty. Financing costs eat into all this severely. You'll have nothing to take out yourself if too-financed, for perhaps 3 years.

The point is, if you aren't sure you can do this, get a job. If stupid cut-throat competitors want to sell at 20% markup, you should probably change fields and get a job. If you have a "me too" product or service with stupid desperate competitors around, that won't pay the debt service and hassle of loans or investors. Remember, investors want at least 20% and usually 32% annual return over three years, that is 100% on their investment back in three years, as stock value, stock sales and/or payments. That is over half of such a fine high-margin company's net income. Is that really worth the cost? If you have no other way, and your concept is huge, and you can manage like Donald Trump, maybe go for it. Otherwise, be conservative with borrowing and especially investors. Avoid investors like avoiding partners as much as possible.
Good luck!

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