NFIB

Smart Money
03/ 07/ 2002

To a perceptive business owner, "smart money" is defined as financing that includes support and expertise for your business in addition to capital. Shrewd financing requires the same attention to obtaining capital as the attention given to decisions involving the business's basic product or service. In today's Workshop, Edith Helmich describes four typical sources of capital to get your business started.

Exploring financing sources is necessary before selecting the most suitable one for your business. Four of the most common sources for capital have very different attributes for individual business circumstances.

Government Financing Programs

The Small Business Administration (SBA) offers a number of financing and operations assistance programs through a network of participating banks, non-bank lenders, certified development companies and SBA-licensed companies. Programs are diverse and include "micro-loans" with a $25,000 maximum limit for short-term loans intended for start-up or business expansion purposes. These contrast with the SBA 504 Loan Program for long-term, fixed rate financing for investment in fixed assets, allowing businesses to avoid large down payment and floating interest rates.

Entrepreneurs can find detailed information about grant and loan programs in other federal agencies in the "Catalog of Federal Domestic Assistance," published by the U.S. Office of Management and the Budget.

In addition, most states sponsor a variety of public funding sources. States often pool public funds with money from a conventional lender to meet the needs of small business borrowers. States also receive federal Housing and Urban Development (HUD) block grants that can be used for local social or economic improvements, including small business financing programs.

Besides state funding, local county or municipal governments often loan small amounts of capital (under $10,000) to local businesses.

Bank Loans

Although most people approach a commercial loan with some trepidation, banks, credit unions, finance companies and others need your business to make their money work for them. When deciding where to take your business, look beyond the interest rate. Carefully consider the two major characteristics that vary among bank loans: the term of the loan and the security or collateral required to get the loan. Before committing to a long-term or short-term loan, it is important to match the length of the loan with the useful life of the asset. A secured loan gives the creditor an interest in specific property (collateral) of the debtor. If the debtor defaults, the creditor can seize and liquidate the property used for collateral on the debt.

Trade Credit

Trade credit is one of the most readily available sources of financing for your business. Suppliers know that most small businesses rely primarily upon a limited number of suppliers and that small businesses are typically low risks. It is possible to purchase supplies and equipment and spread payments over several months or years. You may be able to make a minimal down payment and avoid interest charges as well, particularly after becoming a repeat customer. Expect the supplier to demand a priority security interest in all goods provided to you on credit. You may also have to personally guarantee some of the purchase price, at least for initial inventory. One consideration is that, by purchasing on credit, you forego the cash discount price and pay a higher relative price for your goods.

Advance Payments from Customers

Negotiating a full or partial advance payment from customers may be appropriate to finance preparation costs. In some industries, stepped (partial) payments are customarily payable at defined stages, prior to the completion of the project. Requiring a deposit for work may reduce the need for a line of credit and will avoid the risk of non-payment.

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