NFIB

Can You Get a Loan to Start a New eBusiness?
03/ 07/ 2002

As this article is being written (early Spring 2001), Internet and eCommerce stocks are continuing to fall sharply, with earnings warnings being the trend of the day even among the most solidly established tech companies. This, along with the generally weakening economy (at least as perceived by many investors), makes getting financing to start a new eBusiness extremely unlikely. There are a few exceptions, however, as explained by Jeffrey Moses in today's Workshop.

A year or two ago you stood a great chance of getting a loan for your new eCommerce idea -- no matter how hairbrained the idea may have been. Today, even the most solid ideas for online businesses are having trouble finding financing. But if you have a business that is already up and running -- either retail or wholesale -- and if you and your advisors have determined that establishing an eCommerce wing of your business is a logical next step, you shouldn't hesitate to move forward with your plans.

Why? Because it's been shown that established businesses (brick-and-mortar, consulting, wholesale or distribution) have the best chance of developing a successful eBusiness that is, in effect, an online extension of an already-proven business model. A successful retail operation in a vacation area of Florida, for instance, has built its reputation selling a combination of toys, craft items and art supplies. Using their success as a foundation, about a year ago the owners developed a business plan, pooled some of their own money, and approached a local bank. The loan was approved, and now, a year later, their online "division" is already turning a profit.

This success story was not an overnight dotcom miracle. Development of the business plan, creation of the website, marketing the site and working out delivery solutions and customer service was a full-time job for more than a year. If the owners hadn't received financing, they probably wouldn't have been able to achieve their goals.

In today's declining tech market, the most important part of any business plan for an eBusiness is the financials. Investors (banks, venture capitalists, family members, etc.) are going to be wary of accepting the projections you make regarding when your venture will begin to be profitable. For this reason, you should clearly state how you are going to use the borrowed funds, what your projected "burn" rate is (i.e, how fast you'll be spending money) and what levels of sales you'll need to achieve before the burning stops. Remember, investors themselves have been burned, so the more specific your plan can be, the better chance you'll have of securing financing.

If your company is in a similar initial situation (that is, you're successful and have a track record), and if you have determined that an online presence is a logical next step, start now to arrange financing and implementation of your expansion.

But what if you don't have an existing business to use as the foundation for financing and expansion? In this case, financing will depend on the excellence of your business plan, the quality of your management and personnel and any collateral or initial self-financing that you can come up with.

As stated at the beginning of this article, it's difficult these days to get financing for a new eBusiness. Banks, venture capitalists and private investors have all become extremely skeptical about the chanced for Internet start-ups of all kinds in today's economic environment.

That doesn't mean you shouldn't try -- if you feel that your idea is sound, you can try to put your dream into a viable, pragmatic business plan.

A former Workshop, "Don't Overlook the SBA's Loan Guarantee Programs," outlines how to approach the Small Business Association for loans. The SBA guarantees loans, making it less risky for banks to consider your financing requests. If all else fails, you'll need to self finance, either by using money from your savings, by selling something you own or by putting up something of value as collateral for a loan. For more information about this alternative to bank or venture-capital financing, please see the former Workshop, "Home Equity Loans -- A Viable Way To Finance Your Business, Parts I and II."

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