Credit and Financing

Financing your business is often the critical component to success. There are a wide variety of ways this can be accomplished, depending upon the credit history of your business and how established it is in the market.

Finding financing for your business is just one aspect of your overall financial management of your business, but it is a critical factor for the success of many small businesses.

For those of you who are just starting out, you may want to look at a general overview of startup financing.

The hardest question to answer is what kind of capital should you seek? Often we are not aware of options available to us or don't have the time to explore what is possible. It turns out there are a vast menu of choices each with their pluses and minuses.

Using personal or family funds to finance a business is called Boot Strapping the business. Boot strapping can involve personal investment by the founders, their family and friends and/or the owners foregoing salary. It is wise for every business owner to have at least some personal funds at risk since that shows other potential investors that you are committed to the success of the business.

Another way to get funding to start a business is by participating in a Business Plan Competition. In the competitions, you present your business plan before a panel of judges who will determine the winner(s). Depending upon the particular contest, you may receive a substantial sum of money, and even if you don't win, you will get great pointers on running the business.

Business Incubation is also useful for businesses that are starting up and can't afford secretarial support and the other necessities for handling office functions. Comprehensive support for fledgling businesses in the form of reduced rent, flexible space, shared services, access to professional services and an environment of energy and entrepreneurial spirit are commonly found in business incubators.

If cash flow is your primary financial challenge, there are various ways you can make financial arrangements directly with your vendors, Bartering or you can form Strategic Partnerships in which your business partners with one or more closely allied companies, bringing valuable industry expertise, resources, and/or bargaining power to through the alliance.

For those of you looking for external financing, there are various levels available depending upon the stage of development your business is in. External funds can be raised through:

• Grants
• Loans
• Investors

  Angel Investors
  Equity Financing
  Small Business Investment Companies (SBICs)
  Venture Capital

• Mergers
• Going Public
• Selling All or Part of the Business

Investigate a number of options before you make a decision. List the pros and cons of each type of funding for your business to help you make your final choice. Don't hurry the process even though it may seem urgent to get on with building your business. You are going to need to live with this decision for a long time to come. Take time to find the best long term solution that will contribute to the long term survival and success of your company.

Creating a Budget and Sticking to It

We have been serious about a budget for about 5 years now, which is most of our marraige. We started by reading the book “The Total Money Makeover” by Dave Ramsey. We were introduced to the envelope system which is what we loosely base our budget on, though we use a virtual envelope rather than actual envelopes of cash. Now that we have lived on a budget, I cannot imagine living without one.

I will try and lay out the steps it takes to be successful in the world of budgeting, according to Stephanie Kandray, and hope you can make some sense of it.

Deciding to live on a budget

This may be one of the hardest steps there is. The idea of a budget, tracking and limiting your cash, amongst other things, is not appealing to many. As adults, I think we cherish the feeling of spending our money as we please, especially since many could not do so as a child. We probably thought, Why won’t my parents buy me this toy, I know they have enough money to do so. When I grow up I am going to buy my kids whatever they want. As an adult, most of us have come to realize this is not as good as it sounds. Maybe we did buy whatever we wanted, or even buy our kids whatever they want now, but realize this isn’t the best approach, or hopefully will soon realize this. So, if you are ready to budget your spending, give yourself a high five and please proceed to step 2.

Determining what to budget

Some of our budget categories include Giving, Student Loans and Phone Bill, just to name a few. This step can get tricky because you need to figure out what your expenses are every month. There will probably be some that you do not think to include but will pop up later and you will have to adjust accordingly. The best way to figure this out might be to track your spending for a month by looking at your bank statements, credit card statements, cash spent, and so on. It’s important not to forget things that may only come once every few months or annually like vehicle taxes. An emergency fund is also something to think about. This is another thing we learned from Dave Ramsey. 

Determining your budget amounts

If you are paid a salary where your paycheck is the same every time, this will give you a head start. If your paycheck changes slightly, its best to take the smallest amount it could be, to start. 

So, getting back to your bills. There will be bills that are the exact same every month, like your mortgage or rent and there will be bills that change every month like electricity or gas, depending on usage.

Did I mention this part will be a liitle challenging?

Don’t worry this will help you put your spending habits into perspective and make you feel more in control of your finances. Count how many paychecks you receive per month. If you are married or in a joint household and two of you are bringing home paychecks, there might be 4 per month. When I was working I just labeled them Michael 1st and 2nd and Steph 1st and 2nd. Now, make a column for each paycheck and start with your consistent bills first. I know that my mortgage bill will be $x and is due on the 20th of every month. Michael’s 1st paycheck comes on the 15th so I will put mortgage under that column.

Here’s where the challenge comes in. Each column has the amount the paycheck is for, so you cannot have the expenses within that column total to more than the paycheck amount. I suggest doing this with a paper and pencil first because you will be doing a lot of switching around. (Hint: If you are having trouble evening out the columns to be the right amount of money, split some expenses up. Ex. You will be purchasing gas for your cars a few times per month so you might budget $75 from 1st paycheck and $95 from 2nd paycheck). This has probably been the most painstaking step for you, but I promise, it’s worth it. Now, relax…

Living your budget

Your budget is calculated, everything fits, and you’re actually excited about your finances! [Insert discipline here] Living your budget means living within your means and this might be a new concept for some of you. It’s mostly self-explanatory, but let’s just make sure you get it. If you have budgeted $75 this month for eating out, than that’s all you get.

This might require you to pass up an invite for a double date if your fund is already depleted that month and that will leave you with 3 options. {1} You can politely tell your friends the truth, that you’re on a budget and this meal is not going to make it into the budget for this month but can we reschedule for next week, when we’re into our next month’s pay? {2} You can look at your other funds to see if there is some extra money. Warning: You must be extrememly careful when you do this. An example might be: We have enough groceries to last until the next pay check in the grocerie fund and there is still twenty bucks leftover. I am totally fine with you taking from one to another here and there, but don’t make this a habit because it can come back and hurt you later. {3} You can ignore your budget, have a good time and figure it out later. I’ve done this before and it throws everything off. It’s not worth messing up your budget for.

Another dilema might be with your fluxuating bills. Your electricity bill might be low in October as you havent had to use the A/C or heat much. Well, come December with the Christmas lights and heat at its highest, you will see a spike in the bill. If you can afford to, set your budget to what it will be at its highest and do what you want with the extra money on low usage months. You can also find the average monthly cost and put that much into your budget every month. In months like October, you will have extra money that will cover for months like December when the bill will be higher than the average. Now you’re getting the hang of things!

What if’s

So your paycheck is different every month, what should you do? Like I said, set the budget for the minimum amount you will make. From there you can decide what you want to do with the extra money you might get. You can add it to a fund that is payingoff debt (what I recommend) or to maybe your gas fund if you know you have to travel a little more than normal next month, or whatever you want to do with it. So your paycheck is smaller than your expenses. You have set your budget for the minimum amount of pay but there was an unpaid day off you couldn’t help. Well, you’re just going to have to make it work. You might have to cut a little from your grocery fund and not buy as many snacks, or cut from your eating out fund and eat out less. Whatever is in that expense column for that paycheck, you can make it work.

Keeping track of your budget

This part can be a little time consuming, depending on your method. If you are old-fashioned and like to pay for everything with cash, then go with the Dave Ramsey envelope system. Make an envelope for each fund and distribute the cash within those envelopes. If your envelope is empty, then you will have to wait until next month. I buys things online so this doesnt work for me.

The only fund I use cash for is my groceries.(This requires me to make a list, guestimate the cost of the items on the list and only have as much on the list as I have cash to pay for it). I created “virtual envelopes” using a ledger. There is software out there to manage your money, but I have just been using Microsoft Excell Spreadsheets. I use one speadsheet per fund and keep track using colums like date, add, subtract and balance. This way I can go back look at entries from the past if necessary.

I will be happy to respond to any questions or comments you might have. Below is the funds that we have for our family to help give you an idea:

• Giving (supporting our missionary friends, giving to church or other charities)
• Adah (for diapers, wipes, etc)
• Electricity
• Car Insurance
• Cell Phones
• Internet
• Eating Out
• Trips (car or plane trips to visit family out of state)
• House (things to improve house like candles or a lamp)
• Gas (for our cars)
• Medical (co-pays or other expenses insurance doesnt cover)
• Clothing
• Blow
• Toiletries
• Teddy (our dog, to pay for food, etc)
• Christmas (we save year round for Christmas presents)
• Renter’s Insurance (we are renting our house)
• Cleaning Products
• Health Insurance (I have individual)
• Student Loan Repayment
• Rent
• Gifts
• Car Maintenance (oils changes, fixing breaks, etc)
• Entertainment (netflix, out to movies, buying books, etc.)
• Emergency Fund

The Facebook Valuation

One of the biggest stories of the last week was Goldman's $ 500 million investment in Facebook for approximately 1% of the company. Extrapolating from the transaction, we obtain an implied value of $ 50 billion for Facebook, a number that has been making the rounds in news stories over the last few days. There are three questions that emerge from this news story: (a) With private businesses, can you extrapolate from a single transaction amount to an overall value? (b) Why would a company worth billions choose to stay private, when it clearly has the option to go public? (c) How would you value a share in a non-listed, non-traded company (as opposed to a publicly traded company)?

a. Can you extrapolate from a single transaction amount to an overall value?
Sure, as long as the transaction is an arms length one and all you are getting in return for your investment is a share of the company's equity. If, as is common, there are side benefits or side costs that go with the transaction, extrapolation will yielding a misleading estimate of value. In the case of the Goldman transaction, there are plenty of reasons to be skeptical. In addition to getting a piece of Facebook, Goldman also gets the following benefits:
a. Investment opportunities for Goldman's clients: As part of the deal, Goldman will be raising $1.5 billion from its clients to invest in Facebook. While this may seem to be a favor that Goldman is doing for Facebook, the reality is that Facebook is a hot company to invest in and this will allow eager investors an exclusive entree into the company.
b. A front seat for the Facebook IPO: If at some point in time, Facebook decides to go public, Goldman is likely to be the lead underwriter and reap a big share of the commission.
c. Private wealth management services to Facebook's potential billionaires and millionaires: When Facebook goes public, Mark Zuckerberg and a number of other executives will have the capacity to sell their shares in the market. While I do not expect a wholesale cashing out of equity positions immediately after the IPO, it is likely to happen over time, at which point these very wealthy individuals will need some private banking help and Goldman will be there to provide that help.
The profits and fees from these added businesses could account for a significant chunk of the $ 500 million that Goldman paid in this transaction. Exactly how much will depend on the likelihood of an IPO and the fee structure for the transaction. If, for instance, the present value of the expected fees from these side benefits is $ 200 million, the implied value for Facebook will be $ 30 billion, rather than $ 50 billion.
One more note of caution. Strange though this may sound, I would trust a market price derived from a consensus of a thousands of buyers and sellers to get the value right more than I trust the price from a single transaction, even if the buyer and seller are supremely sophisticated.


b. Why would a company worth billions choose to stay private, when it clearly has the option to go public?
Facebook's reluctance to go public may seem surprising. After all, the conventional wisdom has always been that companies like Facebook should get a more favorable response from offering shares in the public market place than from private offerings to venture capitalists and large investors. Here are some reasons, rational or otherwise, for why Facebook may be holding back:
i. Extending the tease: Looking at the favorable publicity that Facebook has got in the last week from the Goldman deal, it does not look like waiting to go public is hurting Facebook, at least for the moment. In fact, it may be making Facebook an even more desirable investment to those who cannot invest in it right now.
ii. "Proprietary" information: While I don't think that this is a big factor for Facebook, there are some companies that choose to stay private because they are afraid of revealing proprietary information about their products/services to the general market. Instead, they can provide the information, with sufficient restrictions on disclosure, to a few wealthy investors who can then invest in the company.
iii. Founder idiosyncracies: If the founder and majority stockholder in a company decides that he does not want the company to go public, the company will not go public. In the case of Facebook, it is entirely possible that Mark Zuckerberg has decided that he does not want to take the company public and he does not seem the kind of person who can be dissuaded easily.
iv. Regulatory and information disclosure concerns:  From Sarbanes-Oxley to SEC restrictions, public companies are constrained in ways that private businesses are not.
v. No valuation scrutiny: As a publicly traded company, no matter how well regarded it may be, the market valuation will be questioned by skeptical investors. Scaling value to earnings or book value, investors will argue that the company are over priced, relative to other companies in the market. (Take a look at Apple, Google and Netflix, all big winners over the last year, and you will see this phenomenon at play). Facebook gets to have the best of both worlds, again at least for the moment. We get glimpses of its immense value, each time a transaction is made, and no real way to examine whether the value makes sense, since we do not have access to much of the information we need.
In summary, Facebook is in a unique position. It has the profile to raise capital from wealthy investors are favorable terms and is getting many of the benefits of being a publicly traded company without any of the costs. Could that change? Absolutely. If there is bad news (or even rumored bad news) about the company and some or even a few investors have trouble exiting the company, the estimated value could melt down quickly.

(c) How would you value a share in a private company (as opposed to a public company)?
Let's assume that you are one of those lucky investors that has a chance to invest in Facebook. How would you go about valuing the company?
i. Financial data: You have to get your hands on some operating numbers. All you have right now is rumor: Facebook supposedly will generate $ 2 billion in revenues this year and there is no word on how much earnings they will have. You cannot value a company based upon information that is this threadbare and you will need fuller financial statements.
ii. Future projections: Once you have the information, you have to make projections for the future, valuing  Facebook just the way you would value any young, high growth publicly traded company. I have a paper on the topic. Normally, with private businesses, you will discount the value for lack of liquidity but I don't think this is a concern with Facebook shares, even if privately held.
iii. Ownership protections: I don't know about you but I just finished watching Social Network, the movie, and I am not sure that I feel secure that my ownership rights will be protected by the controlling stockholders at Facebook. I would need to make sure that there are enough protections in place for existing stockholders in the event of new capital being raised or an IPO.

So, is Facebook worth $ 50 billion? Based upon current revenues of $ 2 billion, it is richly priced; 25 times revenues and god only knows how many times earnings. The justifications that I hear from analysts for the high valuation are:
(a) An unprecedented platform: The 500 million users provide a platform that could generate much higher revenues and earnings in the future, but a lot of things of things have to go right for this to work out. I am not a big user of Facebook, but my gut feeling is that an overt commercialization of the space will make it less attractive to many users. So, it has to be subtle and creative commercialization... while fending off competition. (Remind me again what happened to Myspace, another hot place to be not so long ago).
(b) Goldman knows best: Smart investors (like Goldman) think its worth $ 50 billion. So, it must be worth $ 50 billion. This line of reasoning is so absurd that it is not worth pursuing. If you think that Goldman does not make big valuation mistakes, you are wrong. What Goldman does well is cut its losses, if it does make mistakes.  You and I will not have that option.
(c) The Big Story: To those who use the big story justification, everyone will be on a social network in the future, and you need to pay a premium to be part of the movement. Having heard variants of the big story before used to justify other bubbles (dot com, telecomm, PCs), I don't buy this. I think the market may be right about the macro story but is being hopelessly over optimistic about the micro pieces. In other words, we may all be parts of social networks a decade from now, but can all of these social networking platforms (Facebook, Twitter, Groupon...)  be profitable? My guess is that there will be a few big winners and lots of losers, before the final story is written. (Remember that the market was right in 1998 about dot-com retailing being the wave of the future but most dot-com retailers never made it through to nirvana. Amazon did and it is worth almost $ 80 billion, but it is the exception.)

Going Public

When your company needs additional capital, "going public" may be the right choice, but you should weigh your options carefully. If your company is in the very early stages of development, it may be better to seek loans from financial institutions or the Small Business Administration. Other alternatives include raising money by selling securities in transactions that are exempt from the registration process.

All public offerings must be registered with the Securities and Exchange Commission (SEC). There are benefits and new obligations that come from raising capital through a public offering.

Benefits:


Access to Capital

A public offering of stock can vary from $500,000 to over $1 billion. In 1999, 544 companies completed an IPO(Initial Public Offering). The total capital raised from these offerings was $23.6 billion. By offering stock for sale to the public a company can access a substantial source of corporate funding.

If a company needs to raise capital, it can sell stock(equity) or it can it issue bonds(debt securities). An initial equity offering can bring immediate proceeds to a company. These funds may be used for a variety of purposes including; growth and expansion, retiring existing debt, corporate marketing and development, acquisition capital and corporate diversity.

Once public, a company's financing alternatives are increased. A publicly traded company can return to the public markets for additional capital via a bond or convertible bond issue or secondary equity offering. A public status can also provide favorable terms for alternative financing from public and private investors.

In general, public companies have a higher valuation than private enterprises.

Liquidity

To sell the stock of a private compnay, a stockholder must find another individual that is interested in owning the shares. This is very difficult, especially for minority positions.

By going public, a company creates a market for its stock in which buyers and sellers participate. In general, stock in a public company is much more liquid than stock in a private enterprise. Liquidity is created for the investors, institutions, founders, owners and venture capital professionals. Investors of the company may be able to buy or sell the stock more readily upon completion of the public offering.

This liquidity can elevate the value of the corporation. The stock's liquidity is contingent on a variety of factors including, registration rights, lock-up restrictions and holding periods. A public company has greater opportunity to sell shares of stock to investors. Ownership of stock in a public company may help the company's principles to eliminate personal guarantees.

Liquidity can also provide an investor or company owner an exit strategy, portfolio diversity, and flexibility of asset allocation.

Compensation

Many companies use stock and stock option plans to attract and retain talented employees. It is increasingly common to recruit and compensate executives with a combination of salary and stock. Stock in a public company can be issued as a performance based reward or incentive.

This reward is more desirable if the stock has a public market. Stock can be instrumental in attracting and keeping key personnel. Also, certain tax advantages are a consideration when issuing stock to an employee. Generally, capital gains taxes are lower than ordinary income taxes. Owners and employees may have specific restrictions relating to the liquidity and sale of the stock.

A public offering can create a market for the company's stock. This market can result in liquidity and reward for the company's employees. A stock plan for employees demonstrates corporate good will allows employees to become partial owners in the company where they work.

An allocation of ownership or division of equity can lead to increased productivity, morale and loyalty. This type of compensation is a way of connecting an employee's financial future to the company's success.

Prestige

A public offering of stock can help a company gain prestige by creating a perception of stability. A company's founders, co-founders and managers gain an enormous amount of personal prestige from being associated with a client that goes public. Prestige can be very helpful in recruiting key employees and marketing products and services.

When sharing ownership with the public, you spread the company's reputation and increase its business opportunities. By selling stock on an exchange your company can gain additional exposure and become better known. This exposure may lead to improved recognition and business operations.

The public status can be leveraged when marketing goods and services. Often a company's suppliers and consumers become shareholders, which may encourage continued or increased business. In this example, a public company could have a competitive advantage over a private enterprise. An IPO can indicate credibility to a company's customers, which may lead to increased sales and a greater corporate profile.

Once public, lenders and suppliers may perceive the company as a safer credit risk, enhancing the opportunities for favorable financing terms. Also, a public offering can create publicity that is effective when marketing your company.

Image

Public firms tend to have higher profiles than private firms. This is important in industries where success requires customers and suppliers to make long-term commitments.

For example, software requires a significant investment in training and no manager wants to buy software from a firm that may not be around for future upgrades, improvements, bug fixes, etc. Indeed, the suppliers' and customers' perception of company success is often a self-fulfilling prophecy.

Publicity

A public offering of stock can generate prestige, publicity and visibility, which is effective when marketing your company. Public companies are more likely to receive the attention of major newspapers, magazines and periodicals than a private enterprise.

A strong ad campaign coupled with media initiatives can potentially increase sales and revenue. The publicity received from a public offering encourages new business development and strategic alliances. Analyst reports and daily stock market tables contribute to the awareness of the consumer and financial community.

A successful public offering can get your company's story out to the world and open an opportunity for investors that are not suited for an investment in a private company. The publicity that a public offering brings can attract the attention of potential partners or merger candidates.

Because the financial condition of a public company is subject to the scrutiny of the SEC reporting requirements, existing or future business relationships are strengthened.

Mergers & Acquisitions

Once a company is public and the market for its stock is established, the stock can be considered as valuable as cash when acquiring other businesses. A successful IPO can have a dramatic effect on a company's profile, perceived competitiveness and stability. This perception can lead to expanded business relationships and added confidence in the consumer.

A valuation of a private company often reflects illiquidity. A successful public offering will increase a company's valuation leading to a variety of opportunities for mergers and acquisitions. With the ability to raise additional capital by returning to the public markets for another offering, a public company is better able to finance a cash acquisition.

A public company also has the advantage of using the market's valuation when exchanging stock in an acquisition. SEC disclosure requirements offer merger candidates the assurance of shareholder scrutiny and accurate reporting of the financial condition or solvency of the public company. Using stock to acquire another company can be easier and less expensive than other methods.

Additionally, Many private firms do not appear on the radar screen of potential acquirers. Being public makes it easier for other companies to notice and evaluate the firm for potential synergies.

Exit Strategy

One of the important benefits of a public offering is the fact that the company's stock eventually becomes liquid, offering reward and financial freedom for the founders and employees.

A public market for the stock also provides a potential exit strategy and liquidity to the investors. A psychological sense of financial success can be an added benefit of going public. A public offering can enhance the personal net worth of a company's shareholders.

Even if a public company's shareholders do not realize immediate profits, publicly-traded stock can be used as collateral to secure loans.

Future Capital

Growing companies constantly need access to new capital. Going public is one way to obtain that capital, but it takes time and money -- quite a lot of both! Going public offers some strategic advantages:

Almost all companies go public primarily because they need money. All other reasons are of secondary importance. The typical (firm-commitment) IPO raises $20-40M, but offerings of $100M are not unusual. This can vary widely by industry.

Once public, firms can easily go back to the public markets to raise more cash. Typically, about a third of all IPO issuers return to the public market within 5 years to issue a "seasoned equity offering" (the term secondary is used to denote shares sold by insiders rather than by firms). Those that do return raise about three times as much capital in their seasoned equity offerings as they raised in their IPO.

Obligations:

• You must continue to keep shareholders informed about the company's business operations, financial condition, and management, incurring additional costs and new legal obligations.
• You may be liable if you do not fulfill these new legal obligations.
• You may lose some flexibility in managing your company's affairs, particularly when shareholders must approve your actions.
• Your public offering will take time and money to accomplish.

While the benefits are attractive, be sure you are ready to assume these new obligations.

Going public can be handled in a number of ways:

Initial Public Offering (IPO): Registration of stock with the Securities and Exchange Commission in order to sell equity ownership to the public.

Small Corporate Offering Registration (SCOR): A low-cost, low-hassle alternative to filing a traditional IPO. Up to $1 million in equity capital can be raised through over the counter sale of common stock.

Angel Capital Electronic Network (ACE-Net): The Office of Advocacy of SBA has established an Internet site where small companies may list their Regulation A and Regulation D 504/SCOR stock offerings. ACE-Net is a cooperative effort between the SBA and nine universities, state-based entities, and other non-profit organizations to provide a listing service where small companies may list their stock offering for review by high net worth investors (accredited investors).

Equity Financing

What Does Equity Financing Mean?
The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation.
More precisely when an owner desires to raise cash by selling part of their business, Its called "Equity Financing." 


Your equity is the value of your company less what you owe. By selling part of that equity, you are giving up partial control of the company.

Such an arrangement can be a partnership, where the person buying in purchases a share in the business and becomes a full partner. Or, if the business is incorporated, for a jointly determined sum of money, the person buying in owns a given percentage of the business.

Often such relationships are built with vendors or other complementary businesses that provide a natural working relationship. It is important to verify the financial background of any investor to make certain they are a good fit and are not going to cause you financial problems down the road. You can arrange for an accredited investor via a Private Placement through investment banks and agents. However, a substantial fee is charged by the banks or agent for finding the investor. If you decide to pursue equity financing, you will need to decide whether the fee is worth the security of find the right match for your business.

What percentage of the business will be given up for the investment is based on what the current value of the business is. To determine what a fair price is, a business valuation will need to be prepared based on reasonable and justifiable accounting methods. Such a valuation should be prepared by a neutral, outside accountant so that both you and the investor are confident that the numbers are unbiased.

Equity financing has a number of similarities with a merger, but in a merger the whole business is essentially sold, and equity financing only involves selling partial ownership in the business. However, because of the similiarities perusing some of the information on Merging Wisely might provide some insight into issues that you need to be concerned with in financing via your equity.

Grants

Grants are a form of funding awarded by a private foundation, or a federal or state government department or agency. They are based on a competitive process with strict guidelines for applying and using the funds. Grant funding agencies us grants as a way to accomplish a specific goal that the organization wants to achieve. Funder's goals can be relatively specific, such as research into a cure for a certain disease, or they can be more general, such as encouraging development of nonprofit support programs for certain segments of the population. A grant can be a wonderful way to finance a business, given that what you need is in alignment with what the funding organization wants to support.

Grants do not have to be repaid, but they do require a considerable amount of paperwork.  In addition to the initial grant application, each organization will have substantial reporting requirements on how the money is used. It also might be helpful to look at some sample grants to get an idea of what is involved in writing a grant application.

Federal and state governments are the most commonly known sources of grants, but there are also a wide variety of private organizations that fund grants. Most libraries have reference books with information on private funding organizations and how to contact them for more information.

The Foundation Center Online provides information on a wide variety of privately funded grants.

Are grants available to start small businesses? The U.S. Government does not offer grants to start or expand small businesses, although it does offer a wide variety of loan programs. While the Small Business Administration does offer some grant programs, these are designed to expand and enhance organizations that provide small business management, technical, or financial assistance. These grants generally support non-profit organizations, intermediary lending institutions, and state and local governments. Some of these programs are the Federal and State Technology Partnership Program and the New Markets Venture Capital Program.

State governments are more likely to give start up money. Many of their programs are focused on specific areas of commerce that they are trying to nurture as a way to expand their state economy. Many of these grants are high-tech related, although that is not true of all states. 

The most promising path to getting grant funding is to identify a need that one of the federal government agencies are trying to meet that fits with the business or product development that you are pursuing with your business. Various agencies of the federal government provide grants for specific activities that they wish to see developed. Identify the federal agencies that are most likely to be interested in the development of your particular goods or services. Then look over what types of grants they are offering.

Additionally, in the annual federal budget process, Congress passes laws making money available to the various government agencies for doing major projects designed to assist various sectors of the economy. 

If you are thinking of applying for a government grant, consider carefully the requirements that need to be met. This is not a free handout. There are many hoops to jump through with serious implications if you do not follow them appropriately. 

Writing the grant itself can be a major hurdle. There are specific formats that need to met, depending upon the agency funding the grant. Many good grants do not get funded simply because something important to the agency was overlooked. If you have any questions or doubts about how to handle the application, do contact the agency. Almost every funder welcomes questions. They do want good applications and can be very helpful in helping you put your best foot forward.

Small Business Administration (SBA) Loans

Congress created the U.S. Small Business Administration (SBA) in 1953 to help America's entrepreneurs form successful small enterprises. Today, SBA offices in every state, the District of Columbia, the Virgin Islands and Puerto Rico offer financing, training and advocacy for small firms. The Agency also works with thousands of lending, educational and training institutions nationwide.

The SBA enables its lending partners to provide financing to small businesses when funding is otherwise unavailable on reasonable terms by guaranteeing major portions of loans made to small businesses.

The Agency does not currently have funding for direct loans nor does it provide grants or low interest rate loans for business start-up or expansion.

The eligibility requirements and credit criteria of the program are very broad in order to accommodate a wide range of financing needs. The most basic eligibility requirement for SBA loans is the ability to repay the loan from cash flow, but the SBA also looks at personal credit history, experience in the industry or other evidence of management ability, collateral, and owner's equity contributions. If you own 20 percent or more of the business, the SBA requires you to personally guarantee the loan.

When a small business applies to a lending partner for a loan, the lender reviews the application and decides if it merits a loan on its own or if it requires additional support in the form of an SBA guaranty. SBA backing on the loan is then requested by the lender. In guaranteeing the loan, the SBA assures the lender that, in the event the borrower does not repay the loan, the government will reimburse the lending partner for a portion of its loss.

By providing this guaranty, the SBA is able to help tens of thousands of small businesses every year get financing they would not otherwise obtain.

To qualify for an SBA guaranty, a small business must meet the SBA's criteria, and the lender must certify that it could not provide funding on reasonable terms without an SBA guaranty.

The SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. In most cases, the maximum guaranty is $1 million. There are higher loan limits for International Trade, defense-dependent small firms affected by defense reductions, and Certified Development Company loans.

The Office of Advocacy of SBA has ranked the nearly 10,000 banks in the country on a state-by-state basis to determine which banks are "small business friendly." The state-by-state directory helps small businesses locate which banks in their area are more likely to lend to small business.

The following are a few of the many specialized SBA loan programs:

7(a) Loan Guaranty Program:

This is the SBA's primary lending program and was designed to meet the majority of the small business lending community's financing needs. In addition to general financing, the 7(a) program also encompasses a number of specialized loan programs.

Low Doc:

This SBA program is designed to increase the availability of funds under $100,000 and streamline or expedite the loan review process.

CAPLines:

An umbrella program from the SBA to help small businesses meet their short-term and cyclical working-capital needs.

International Trade:

If your business is preparing to engage in or is already engaged in international trade, or is adversely affected by competition from imports, the SBA has the International Trade Loan Program.

DELTA:

Defense Loan and Technical Assistance is a joint SBA and Department of Defense effort to provide financial and technical assistance to defense-dependent small firms adversely affected by cutbacks in defense.

Microloan Program:

This SBA program works through intermediaries to provide small loans from as little as $100 up to $25,000.

Certified Development Company (504 Loan) Program:

This SBA program, commonly referred to as the 504 program, makes long term loans available for purchasing land, buildings, machinery and equipment, and for building, modernizing or renovating existing facilities and sites.

Information courtesy of the Small Business Administration.