Small Business Resource Center
5 Ways to Finance a Startup
Small businesses are critical to our economy. Businesses with fewer than 500 employees make up 99 percent of all businesses, and many of those are startups. The unique challenges that any startups face when compared to established businesses are only accelerated by today’s volatile economy.
The challenges aren’t as daunting in Tennessee, thanks to our stable local governments and their adherence to prudent fiscal policies. Local home sales, a leading indicator of the economy, are stabilizing and even growing. In addition, the state is known for its entrepreneurial spirit and performance.
If you’re considering starting a business, here are five common options you have for financing:
- Personal funds. If you have a very small business with limited revenues at the beginning, you probably need to use your personal funds. This includes your savings accounts, possibly your retirement account, and other assets, such as marketable securities that you could sell if necessary, cash surrender value of your life insurance or the equity built up in your home. Be sure to do a thorough risk analysis to determine if using these funds for a business startup is a sound decision.
- A working line of credit from the bank. This option includes the capital you contribute. A working line of credit is secured by the company’s business assets (e.g. accounts receivable and inventory) and typically requires a personal guarantee as a secondary source of repayment. The amount of the line is usually based on 75-85 percent of eligible receivables and 50 percent of the value of the inventory, depending on type and specialty nature of inventory.
- An “asset-based” line of credit. This option is also in addition to the capital you provide and is somewhat riskier than standard bank financing. The line of credit goes through an asset-based lending company and is dependent on the quality of the accounts receivable and the inventory. This option could incorporate leasing of equipment, titled vehicles and other fixed assets.
- SBA loans. If your startup can demonstrate significant job opportunities, you may qualify for some type of government-guaranteed lending program. Pinnacle has helped clients use the Small Business 504 program through the Mid-Cumberland Area Development Corporation. They require the owner to inject 10 percent. The bank then loans 50 percent of the total need, and Mid-Cumberland loans 40 percent on extended terms.
- Cash from individual investors or firms. Cash from investors for partial ownerships and even funding from an investment banking firm or a venture capital firm is the fifth option. It makes sense for a larger startup whose revenues are expected to grow rapidly but may have losses for the first few years because of the amount of investment required. This option includes your equity injection, individuals or institutions who invest in return for partial stock ownership and/or “loans” from investment banking or venture capital firms.
Despite the challenges of starting your own business, the rewards can be great. Having a clear, concise and realistic business plan, planning for the unexpected, monitoring your growth and having access to cash will help your startup’s chances of success.
Kevin Roddey can be reached at 615-690-1421 or by email at [email protected].
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