The Amateur Financier

It’s that time of week again, when the joy of starting a small business is grabbed, wrung out, and strewn on my blog for all to see.  Yes, it’s Small Business 101.  This week, we’re going to be looking at one of the most important factors for any small business owner to consider: getting the money to grow your business.

Q: Why do I need to look at outside funding, anyway?

A: Unless you’re independently wealthy (in which case you probably are starting your small business more as a hobby than a source of income, anyway), you will likely reach the point where your successful business has grown as much as it can using only the resources you have available, that is, your personal wealth and the business’s own income.  While bootstrapping can be an excellent way to get your business started without getting into debt, sometimes you need outside money in order to expand.

Q: Alright, how do I get this outside money?

A: Just as you have numerous ways of getting extra money in your personal life (borrowing from friends, taking a bank loan, doing a cash advance on your credit cards *this last one is NOT recommended, by the way*), there are several methods that can be used to pick up some extra cash to grow your business.  Loans, grants and venture capital are all ways to build up your capital reserves and allow your business to grow.

Q: Well, let’s take it one step at a time; what sort of loans are available?

A: There are a variety of different loans available.  Basically, anyone willing to give you money in exchange for the promise that you pay it back (possibly with interest) could be a source of funding.  Your parents, your friends, your immediate family; if they will give you money, they could be a source of funding.  With personal loans like these, how much you want to do in terms of setting up official terms and writing out a contract will depend on you and the person from whom you are borrowing; although, having a paper trail, preferably one verified by an outside source, will make matters easier if you wind up in court at some point in the future.

If you want to go for a more ‘official’ route, or simply don’t know anyone willing and able to loan you the amount you need, there are any number of sources for loans from banks to get your company moving in the right direction.  If you’re an American, it’ll be worthwhile to look for Small Business Administration (SBA) Loans.  While the SBA doesn’t make loans directly, they do provide assurances to lender that a portion of your loan will be repaid, even if you end up defaulting.  As a result, you will usually get much better terms (lower interest rates, longer repayment terms, higher loan amounts) than would be possible without SBA backing.  To learn about SBA loans (and the qualifications you need in order to be eligible) check here for more details.

Q: Alright, so it’s not too hard to get a loan; what if I want a grant, instead?

A: Well, good news and bad news in this respect.  The good news is, if you have an exceptionally generous family, you might be able to wrangle funds from them without the need to pay it back.  The bad news is, if you don’t have a generous family, or lack a few well off family members to provide the grant, you’re probably out of luck.  The federal government most emphatically does NOT give out grants to businesses, and private businesses tend to balk at that sort of arrangement, as well.  (They say something about wanting to make a profit themselves).  There is a small glimmer of hope, in that some states or local governments might be willing to grant you money to help you produce jobs in their area, so it might be worth approaching officials in areas to which you’d like to relocate.  But even then, don’t get your hopes up.

Q: Fiddlesticks.  How about venture capital?  Where can I get some of that?

A: Well, if your company shows promise and high potential future profits, you can approach venture capital investment companies about the possibility of getting funding to grow your company.  The requirements tend to be steep, however: venture capitalists are out to make a profit, after all, and in return for their funding, you will typically have to agree to provide them with a good amount of equity (that is, ownership of your company) when you go public.  You’ll also generally have allow them oversight of your company as they help you to grow and bring it public.

If you are still interested in venture capital as a means of funding your small business, you can check out the government’s Small Business Investment Companies Program (SBIC), which helps match small business owners with venture capitalists.  (Never let it be said that the government doesn’t try to help small business.)  You can learn more about the program, find out what you need to do to get funding, and even search for venture capital firms based on your location, size, and field of work.

That should help you to get more money than you could ever possibly need to grow your business into a globe crushing behemoth (I’m looking at you, Microsoft.)  Just remember, there is money out there if you know where to look.  Good luck in growing your business!

(Welcome, welcome, welcome!  It’s time once again for that most fun day of the week, Small Business 101 Day!  Yes, it was getting boring calling the day after Monday something like Tuesday, so from now on, I shall refer to it as, Small Business 101 Day! Think it’ll catch on? Well, probably not. But that doesn’t mean I can’t still share some good business related advice.)

Q: Wait, why do I need to know about any corporations other than LLCs?

A: While LLCs are useful structures for small businesses, particularly those that only have one member who wants the legal protection that a corporate structure can provide, they do have limitations.  One of the biggest of these limitations is that other corporations, unlike LLCs, are able to issue shares of themselves to the public, as a means of raising money and spreading control of the corporation.  There are also rules in some states that will dissolve an LLC after a set period of time or upon the death or bankruptcy of one of the members of the LLC, making it harder to maintain the structure for an extended period of time.

Q: Alright, what about a C corporation structure, then?

A: A C corporation is what many people think of when they hear the term ‘corporation.’  They have to follow very specific rules about filing status, must elect a board of directors, and are required to hold annual meetings.  They are also subject to double taxation on profits; the money earned by corporations is taxed when it is earned by the company, and again when the money is distributed to shareholders as dividends.

Q: Yikes, that’s pretty rough; why bother with a C coporation at all?

A: One word – stocks!  Yes, unlike LLCs, having a corporate structure enables your business to issue share of stock.  Besides being a way to raise money for your business, you’ll also be able to distribute stock to employees for compensation as well as being able to sell your own shares for the purpose of diversification.

Q: Oh, that makes sense; where do S corporations come into play?

A: S corporations are a sort of compromise between C corporations and LLCs.  They have many of the same requirements as C corporations in terms of having a board of directors and holding annual meetings, but they don’t have to deal with double taxation.  By meeting certain qualifications, the S corporation can avoid taxation at the corporate level.

Q: Cool!  How can my business become an S corporation?

A: Well, once you have a corporation, you can elect to have it become an S corporation as defined by the IRS.  Your corporation will need to have only one classification of stock with less than one hundred share holders, who all must be natural persons (no corporations, partnerships, or other legally created entities).  Assuming your corporation can meet all these requirements, it can elect to file as an S corporation; if later one of those requirements is not met (if, for example, your corporation goes over one hundred shareholders).

Q: All of this is interesting, but do I really need to know all of this information about corporations?

A: Well, besides being interesting in itself, if you have a small business, you’re probably hoping to expand it one day.  When you do, you’ll be confronted with issues about which type of corporation you’ll eventually choose for your business.  Knowing what types of corporations are available, as well as the advantages and disadvantages of each, will help you to make the best decision possible.  Hence, my goal in attempting to educate and entertain you.  A good overview on several of the main corporate structures can be found here.

That’s it for this time; come back again for more helpful hints on starting your own small business.

(Welcome to another addition of Small Business 101.  Today we’re going to talk about bootstrapping, one option you can take while starting a small business.  Let the funding talk begin!)

Q: Alright, just what is bootstrapping?

A: Bootstrapping is where a small business makes due with only a small amount of capital and spends it only as it comes in.  In essence, you treat the business the way you should treat your personal expenses, only spending the money you actually have, rather than relying on debt and borrowing to provide your working capital.

Q: That’s all it means?  Why the odd terminology?

A: The term bootstrapping apparently derives from The Surprising Adventures of Baron Munchausen, an adventure story first published in 1781, wherein the hero apparently pulled himself up out of the swamp by his bootstraps (or possibly his hair).  The idea being to rely on your own skills and attributes in order to make your business (or other venture, as there are several meaning of bootstrapping) a success.  As to why this particular phrase from this particular book became the reference point for this phrase, to that I don’t really have a good answer, other than it sounds pretty rugged and self-reliant.

Q: *Humph* Alright, why try to bootstrap?

A: The alternative to bootstrapping is to get money from an outside source, such a business loan or money from investors.  While these methods do their own advantages (which we’ll get to in a minute), they have the drawback of making your company beholden to outside influences.  You’ll have to ensure that you can meet repayment terms of the loan or the demands of investors on top of all the other requirements of your business endeavor.

When you bootstrap, on the other hand, you’ll only have to worry about satisfying your business’s needs.  There’s no worry that if your business fails, you’ll be left with a bank loan that needs to be repaid or angry investors who may attempt legal action against you.  You’ll also have to work within the limits of your business’s income, the same as with sticking to any other budget (which many people could use more experience doing, if recently history is any guide.)

Q: What are the downsides, then?

A: In a word, money.  Bootstrapping means that you’re going to be relying on your own money to provide all the initial capital you need, at least until you start producing an income from the business that can cover your expenses.  Depending on what type of business you want to start as well as your personal savings, you might be able to finance it with your own savings without a problem.  If you want to start an Internet based business, for example, you’ll likely be facing fairly low monetary barriers.  If you already have a computer, your only costs will likely be for hosting and a domain name, neither of which will cost much more than one hundred dollars a year, if that.

On the other hand, if you have your eye on a business that requires a physical location, you’re going to face much higher expenses.  The cost of the building, renovating it for your particular business, buying supplies, hiring workers (if you need them); all these expenses add to the cost of getting your business off the ground.  If you don’t have a rather large amount of money in your personal savings (enough to start your business while still leaving money for your personal expenses and a hefty emergency fund), you’ll likely need to get funds from an outside source, whether a bank, interested investors, or your family and friends.

Q: If I want to bootstrap my way into a small business, how should I do it?

A: The first step is to make sure you do your research and learn just how much time, money, and other resources you’ll need to put into your business.  If it is something you can do part time, like wordpress.com/” target=”_blank”>starting a blog, making and selling crafts, or selling artwork, you can continue to work a regular job and build your business during the nights and weekends (a very popular method of expressing your entrepreneurial desires).  If your business plan involves more involvement, things get trickier; you could find yourself a partner (or more than one), split the duties with your wife or husband, or perhaps even rely on your spouse’s income if you leave your job to build up your business.  There are almost as many ways to pursue your dream as there are dreams out there, you just need to find the one that will work best for you.

That’s it for bootstrapping; good luck pulling yourself up by your bootstraps, everyone who’s looking to start their own business!

Additional Resources

Entrepreneur Magazine’s take on Bootstrapping

Ten More Tips from Entrepreneur

Ten Bootstrapping Lessons From VentureBeat

(Welcome to the third installment of Small Business 101, where we discuss all the information that the would-be small business owner needs to make a successful business.  Today, we’re going to be taking a look at one of the other sources of information for future small business owners, the Small Business Administration.  Now, try not to get too attached to their site; I expect you back here for tomorrow’s blog entry, after all.)

Q: What is the Small Business Administration?

A: The Small Business Administration (SBA) is the United States government agency that administrates to small businesses.

Q: Can you tell me anything else about them?

A: Alright, don’t have a sense of humor.  The SBA was created by the US government to promote small businesses, established in 1953.  It does many things for small business persons, from guaranteeing loans for small businesses to creating resources that help you learn more about creating a business.

Q: Wait, what was that about loans?

A: One of the major functions of the SBA is to guarantee loans made to small business owners.  When a bank or other lender makes a loan to business owners, the SBA guarantees the loan, provided that loan meets its qualifications.  The SBA backing makes the loan less risky for the lender, encouraging them to complete the loan. Thanks also to this backing, SBA loans are typically for longer periods of time, lower interest rates, and sometimes a larger sum of money than most private loans.

SBA Loans Can Help You Start a Business, Even If This Is All You Have In Your Pocket

There is another type of loan that is available though the SBA, disaster assistance loans.  These loans can be for any non-farm, private property damaged in the course of a disaster.  There are numerous qualifications that need to be met (as noted here) but such loans represent one method of getting your home back into shape after a disaster.

Q: Impressive.  What else does the SBA offer?

A: The SBA does offer a great deal of resources for small business owners (as well as though who want to be small-business owners) through its website.  One of the most impressive, to my mind, is their Small Business Planner, which provides resources for every step from planning a business to making it into a reality, and even how to get out of the business when you’re ready to retire.

There are also educational resources, for those who want even more information about starting their own small business.  There’s a list of frequently asked questions about small business, which provides all sorts of facts and figures about small business (including the often cited fact that half of all Americans are employed by small businesses).  And if you need more assistance, there’s links to local resources to lead you to additonial help.

As you might be able to tell, I am kind of psyched by all the stuff on the SBA website, and think it’s a good place to start all your small business research (well, after the amateur financier, that is).  As I look more into growing this site into more of a business (as well as possibly starting another business, if I am so inclined), I’m sure I’ll spend plenty of time on their site, and I hope you enjoy this brief overview, as well.  That’s it for now, have a great day!