Late-night television advertisements offer to solve many of life's challenges.
Too little hair in the right places? Too much hair in the wrong places? Extra pounds in too many places? Solutions to these common problems are sold every day - for three easy credit card payments.
Breathless salesmen also tell us they know the secret that has baffled entrepreneurs for generations: where to find money for a new business.
Many of these salesmen claim to know the secret location of numerous government grants and loans, and that all an aspiring entrepreneur needs to do is apply to receive a check. In fact, the U.S. Small Business Administration, through banks and other lenders, has provided loan guaranty programs to qualified small businesses for many years.
SBA-guaranteed loans have greatly increased access to capital for small businesses, but not every applicant is approved. And the SBA does not provide "free government money" for starting a business.
Before we reveal "The Secret," let's look at the options for financing a business.
Equity investments are money or property put into the business in exchange for an ownership share. Owners have the riskiest position - they get paid last if a business fails. But they also have the greatest reward if the business is successful.
Family and friends are often the first place to look for equity. If those closest to you don't believe in the idea, who will? Private equity investors, often referred to as "angels," are also an option, but a good Rolodex of contacts is required because angels don't advertise.
Determination, negotiating skill, and creativity are needed to first find an angel investor and then reach an agreement you can live with.
Debt is the second major financing option. Banks and non-bank commercial lenders scrutinize loan applications carefully. They are not likely to lend for a venture they see as too risky. The reason is simple: the lender's potential is only the timely repayment of the loan plus the interest.
Whether an owner should seek equity or debt will depend on many factors, starting with the owner's personal financial situation. A new owner with some cash, related management experience, a good business plan, strong personal credit, and extensive personal assets for collateral will get a cordial reception from a banker.
Borrowers may be able to overcome shortcomings in one or two of these criteria and receive a loan approval, but often loan applications with serious flaws must be strengthened with additional equity, more collateral, or a co-signor.
Shopping for either equity or debt requires a lot of planning, preparation, and work - perhaps as much effort as is given to planning and managing the business itself.
Owners must be able to describe clearly how much money they need, why they need it, how and when the business will generate enough cash to repay the principal, and how and when the business can provide a rate of return in line with the risk.
A written business plan or financing proposal is a must because it is the best way to lay out the issues, reduce the perceived risk, and clarify the potential reward for the investor or lender.
Entrepreneurs must evaluate the strong and weak points of their proposals, then pursue the funding option that has the greatest chance of success.
I have provided this "secret" free of charge, but putting it into action is certainly not easy. Contrary to what they say on late night television, it's no secret that finding money is hard work.
Bernie Meineke is a business consultant with the University of Georgia's Small Business Development Center. The local SBDC office can be reached at (706) 737-1790.
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