New Jersey Enterpreneur - Small Business, Entrepreneurs and Venture Capital

The first question asked is when will the money will be repaid, followed by the second question, what will it be used for that suggest payment will be likely. These same questions apply to family and friends, as well as any corporate lender such as banks, finance companies, venture capital firms etc.

Since the early stages of a business are often periods of great uncertainty, the answers to these questions are often difficult to define. The business plan is a great tool to assist the entrepreneur in presenting critical information to third parties and requires much research and planning to answer those two fundamental questions mentioned above. The business plan alone will not guarantee funding from others, however, without it and with not track record of sales and profits, the likelihood of any financing become minimal. There are a number of alternatives open to the business owner:

Banks are very cautious in how they will lend to entrepreneurs. In fact, most will require a track record of sales and profits in addition to the business plan. The new business owner should initiate discussion with their local bank representative about future financing and explore other banks to learn more about each bank?s credit policy which may differ significantly from the other banks. This process will help the individual t better understand what needs to be addressed to meet the lender?s standards.

A secondary benefit of meeting with various lenders may be to involve intermediary or secondary lenders such as the Small Business Administration or Economic Development Councils who may guarantee the loan and reduce the risk to the bank. There are unique criteria for SBA loans, and not all loan officers are familiar with these secondary lenders. Meeting with various banks and representatives may lead to the right resources.

An Alternative Way to Borrow from Banks Some banks may consider lending directly to the entrepreneur as opposed to the business. One factor in this is that repayment of loans to incorporated business may avoided since owners are not typically personally liable for company debt in the event of failure. Some banks may loan money directly to an individual based upon the individual?s credit standing which is determined by personal net worth or assets such as stock that can be pledged as collateral.

SBA Government Programs have been established to share or lower the risk of bank lenders. Banks typically evaluate the company?s credit risk that caps the amount of money to be loaned or loaned without some type of guarantee. In this situation the SBA may guarantee the loan or lend the difference between the amount requested and the amount the bank is willing to lend. The SBA also makes low dollar loans that meet their own set of criteria and do not involve the bank at all.

SBIC or Small Business Investment Corporations are government sponsored entities that are privately managed and also lend to small businesses on their own set of criteria.

Venture Capital Firms are companies that possess a pool of resources to be invested in high risk ventures that show great promise of success and high returns to the investors. Funds provided are often given in exchange for partial ownership that will yield great rewards when the venture firm sells its share when it exits. Business ventures seeking venture capital must meet a number of criteria that ventures with more modest goals do not need to meet; this includes a solid business plan, a strong management team, projections indicating high revenue growth in a relatively short period of time and more.

Angel Investors, often running in the same circles as Venture Capital Firms, are typically very high net worth individuals willing to risk their own personal funds. This permits greater flexibility in the decision making process that the v.c. firms do not have since the v.c.?s are accountable to others as to where their money is placed. Angel investors will have many of the same requirements as the venture firms, but as solo investors are open to situations that are personally appealing.

Finance Companies are possible lenders once the business has established some track record of sales. Finance companies primarily lend funds against hard assets that may be sold in the event of business failure and this better insures repayment. Assets may include the inventory or the equipment bought with the borrowed funds. Factors are finance companies that specialize in lending against the accounts receivable or inventory of a company. When a company sells goods, it becomes an accounts receivable of the company which is the money owed by the company?s customers for goods purchased. This type of lending is more common in certain types of industries such as fashion or clothing manufacturing where small manufacturers sell large quantities of merchandise to large fashion or retail companies with good credit ratings.