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Finding the Right (and Avoiding the Wrong) Start-Up Funding

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Mar 20


Industry reports say banks have money to lend and are ready and willing to lend to the right businesses.  Being one of those small businesses often feels like playing and not winning the lottery.  Each time you complete the loan application and sit in the lobby waiting for your opportunity to pitch your business, you’re filled with such great hope for your future.  The entire successful business vision plays out in your head as the clock ticks ever closer to your appointment time.  Sixty seconds into the bank manager’s meeting and your stomach drops. The realization that today won’t be your day returns. Five minutes later you’re shaking hands across the desk with the promise of future opportunities when your business has more ‘stability’. The Small Business Catch-22 has struck again:  How to gain the right type of funding while still maintaining your business’ worth and keeping risks minimized.


It’s these moments, the times when a business owner feels most desperate that bad financial decisions are often made. Questions arise about what could have been done differently, the type of business plan that would truly make the business stand out in a sea of prospects, and alternative quick cash offers are all considered. A few are tried and costly, if not devastating to the business.


Here’s what to avoid:


  1. Cash-Advance Lenders. These high-priced loan sharks can put you and your business into a financial spiral in less than three months. Built on the notion that short-term cash will be your salvation, the loans are easy to obtain, but are packaged with exorbitant interest rates and ridiculously short payoff timeframes. When the business owner can’t repay the loan in the short seven- to fourteen-day period, the loan rolls into another loan, with accumulating interest that quickly spirals out of control.

  2. Fee-first loan brokers. Run don’t walk away from any lender that wants to help you find loans for an ‘upfront fee’ or ‘brokerage charge’. These unprincipled lenders only want to take your money and if or when they provide you with any services, you will have been better served to do the leg work yourself. Look for a broker who is willing to commit to your business by investing their time to find the right lender for your small business.

  3. Business credit services. Fact: Small businesses don’t have an established credit history.  Most banks and small business lenders expect that small enterprises won’t apply with an extensive business history, so don’t be misled by credit service companies that promise to give your small business a quick line of credit.


What you should consider:


The Small Business Investment Company (SBIC) is part of the Small Business Administration’s array of services to help businesses connect with resources for capital investment. Formed in 1958 to “bridge the gap between entrepreneurs’ need for capital and traditional sources of funding, the SBIC makes debt and equity investments in some of America’s most promising small businesses.  While the SBA doesn’t grant the loans themselves, the agency does provide funding to “qualified management firms with expertise in certain sectors or industries. For every $1 an SBIC raises from a private investor, the SBA will provide $2 of debt capital, subject to a cap of $150 million.[i]


As part of the program’s achievements, the SBIC had


  • invested $3.13 billion dollars in small businesses

  • provided 937 small businesses with financing, 29% of which were in low-to-moderate income areas or were minority-owned.


Like any government interaction, there are rules governing how the SBICs can lend and to whom. SBICs can invest in businesses using loans, debt securities with equity features and equity.  The businesses must be located in the U.S. or its territories and the business must have more than 51% of its employees located inside the U.S.  SBICs cannot invest an amount greater than 30% of the SBIC’s private capital in any single company.


To qualify, small businesses must have a tangible net worth less than $18 million and average after-tax income for the prior two years of less than $6 million. SBICs must also make 25% of their financings in “smaller businesses” which are defined as businesses with a tangible net worth of less than $6 million AND average after-tax income for the prior two years of less than $2 million. There is also a term of control of no longer than seven years after which, the SBIC must request approval from the SBA to continue controlling authority over the small business.


If using an SBIC isn't the right fit for your small business, consider a more traditional SBA loan or grant program.  Information on these types of loans can be found at http://www.sba.gov/category/navigation-structure/loans-grants


For even smaller start-up funding, research crowdsourcing opportunities through organizations like kickstater.com.  Perfect for project-based business ideas like bringing a new product to market, funding a documentary, or underwriting the production of a music CD, crowdsourcing involves pitching your idea to individuals who will be so moved by your idea that thy will contribute to your efforts.  In return for their investment, backers often receive a copy of the published work, invitation to the film's premier or other perks.  Unlike the above investors, crowdfunding investors are often not in it for the financial gain, but the more altrustic purpose of funding creative projects that would otherwise go unfunded and not exist. To learn more visit the Kickstarter School.


PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

To find a trusted accountant in your area, visit www.SmallBizAccountants.com. Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230. 

Copyright 2014 Professional Association of Small Business Accountants




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