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Where's the money? A new view of effective capital sourcing for small business

Where's the money?
A new view of effective capital sourcing for small business
By Richard Walton
Contributing Writer

Small business owners increasingly come to the SCORE office where I volunteer with this question: "Where can I get a loan or a grant to start my business?" It is a crucial dilemma for many start-ups largely because credit availability has tightened considerably over the past several years, and coupled with the economic recession the outlook is considered by many to be quite bleak.
(BOLD)The Three-Step Program to Financial Success in Getting the Money You Need
Loan and grant funding is available to a properly prepared borrower who does the research and presents a clear and compelling loan or grant application to the funding agency, whether it be a commercial bank, government agency, (including local, state and federal) public, or a private organization or individual, such as an angel investor. The key determinants of success are 1) Start with a complete history of what you bring to the table, such as a Business Plan, credit history (personal if the business is not yet operating), 2) Search the available sources for loan and grant information (SCORE is usually the best first step) and governmental resources at the local and state and federal levels (try searching on the Internet for small business funding information) and 3) Network among local associations and individuals to learn as much as possible about financial resources and consider taking short courses and reading up on finance. Note: If you don't know what breakeven analysis, ratio analytics, and cash flow management are, you will hardly impress a lender with your ability to manage your funds so as to repay a loan.
These three steps are likely to pave the way for you to make a sound presentation of your financial needs, and also the means you will have to either pay off the loan or fully qualify for a grant. Remember that it takes time and patience, as well as preparation, but it is a good way to reach your goals of getting the funding to start your business. Below are some further ideas and suggestions for each of the three steps outlined above.
(BOLD)Step 1 - What Do You Bring to the Table
Make a complete list of your personal credit history, including credit scores, present bank accounts, savings, other investments, and personal earnings history. Develop a Business Plan for your start up complete with financial, marketing and production information, volume (sales) projections, and both cost and profit projections, together with the basis for them.(such as market research, including trends and opportunities, and competition that you will face). A very important part of this exercise is showing clearly how the loan will be repaid, or how your organization will manage grant funds to the satisfaction of the granting agency. SCORE can help at every step of the way in this exercise. Be sure to indicate your capacity for cost management. Operating frugally is a good first step.
(BOLD)Tips to Make Step 1 Work For You
Make sure you understand your own financial history and can speak clearly about your plans (read up on the 'elevator pitch'). Demonstrate that an accountant, not you, prepared your financial data individually. This lends additional credence to the details. Show that you are running an organization, not just a single person company.
(BOLD)Step 2 - Search the Possible Sources for Loan and Chart Funding
In nearly every community there are governmental resources available to the small business entrepreneur. Additionally, local banks will often list their lending policies on their websites. Both the SCORE and SBA websites (, and include extensive information on grant and lending resources. Locally, municipalities and state funding agencies can provide information on their programs. Specific lending and grant qualification standards are listed as well, and it is important that you develop the best match possible between your funding needs and the lender's funding area. It is obviously important to make personal contact with the lender also and try to understand what their credit evaluation standards are. A bank, for example, is likely to be more interested in your application if you have maintained an account with the bank (and it is in good standing) for a year or more. Be aware of all the potential sources of funds, including angel investors, venture capital firms, foundations, the SBA loan guarantee programs, community development corporations, the CDC lending programs, non bank SBA lenders, banks that do not work with the SBA but provide small business loans, community banks, P2P loan programs and community development financial institutions.
It is also possible to obtain capital by selling part ownership in the firm, which is known as equity financing. While this method of raising initial capital might be less attractive to the entrepreneur due to the fact that it results in having an investor who now owns part of the company, there is one solid advantage in equity financing, which is that it does not require repayment. While grants from foundation sources will not require repayment, the process for obtaining grants is lengthy and reporting requirements may be difficult to prepare and maintain.
(BOLD)Tips to Make Step 2 Work For You
It is important to know the individuals whom you will be contacting at the various providers, so making some personal contact with the individual is a good idea before making a formal request for funding. Take your time with the Internet research. Try to see all the possible sources of funding and the conditions under which they provide financial assistance to entrepreneurs. Don't forget to check the special assistance programs available to minority business owners and veterans.
(BOLD)Step 3 - Going After the Money
At this point you have developed a good record of your own financial history and a solid projection of your future plans and you can demonstrate a real need for the funding you are seeking. You have obtained good information about what possible funding sources are available to you, and you are ready to make application. You should be able to show that the funds are going to be used in such a way as to provide reasonable expectation of repayment to the lender. Having your own funds at risk and invested in the organization is another sign of your commitment to making the new business work. It is also desirable to show that you are not alone in the venture, and that your business will be operated as an organization, not as a one man or one woman show.
(BOLD)Tips to Make Step 3 Work For You
Have a copy of your business plan, your own financial history, as well as the financial history of your business (if any). Note that it is possible to obtain startup credit from a financial institution, but without any operating history, the basis of any loan will be your own credit standing. Critical factors in making the pitch to a financial institution for your credit requirements are both the purpose of the loan, and the means by which it will be repaid. To the financial institution these are the twin bottom lines. The purpose of the loan should be to enhance the profit making capability of the firm, and the means to pay it back should be easily understood and bullet proof in terms of the likelihood of working out favorably, that is that the money will be available at repayment time.
A final point is that capital is a never-ending requirement for effective business operations over both the short and long term. There is a need to obtain the funding, but also to manage the organizational financial resources once in hand. This is done via effective and frugal financial management, such as maintaining positive cash flow through careful shepherding of resources, reducing the amount of time that it takes to collect accounts receivable and other monies owed the firm, and increasing the amount of time that you hold on to your cash, through getting extended trade credit, and for example favorable purchase or lease arrangements on needed equipment. Inventories should be especially well managed since the possibility of obsolescence is ever present.
And while the search for and management of capital is an ongoing process, so too should be the human resource component of the organization. The firm should be continually growing in its human capacity, which is a product of training and development as well as experience. SCORE is especially helpful in this regard through its wide range of free training programs on all aspects of creative and effective management.

Mr. Walton teaches Entrepreneurship and Quality Management at Frostburg State University. He is also Assistant District Director for SCORE, Western Maryland, and the President of ERMACORP, a Hagerstown based Management Consulting Firm. He may be reached at 301-462-9850, or by email to

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