or search on Google for “angel investing groups in” your area of the country.
You can also seek out debt financing, which is achieved by borrowing money from a bank, credit union, or the U.S. Small Business Administration. These entities rely heavily on the business plan, financial forecasts, and the personal finances of the owners of the business. A new business is much more likely to obtain debt financing if the owners have committed a significant portion of the capital required for the business to get off the ground, have a good credit rating, and have a business plan that looks solid and sensible. They also like to know specifically what qualifications you have to run such a business.
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When looking for sources of financing, go to Entrepreneur’s website www.entrepreneur.com/bestbanks, and check out their up-to-date listing of best banks for entrepreneurs.
One positive aspect of borrowing from banks or credit unions is that they don’t want control—at least beyond the control exerted in the covenants of a loan document. And they don’t want ownership. Bankers make loans, not investments, and as a general rule they don’t want to wind up owning your company.
Loan covenants may require you to do all sorts of things, from setting a minimum amount of working capital you must maintain, to prohibiting you from making certain purchases or signing leases without approval from the bank. For this reason, you want your accountant, financial advisor, and/or attorney to review your loan documents and spell out everything for you very carefully. Also review the many types of loans that are offered and determine which is best for your situation.
According to the National Credit Union, there are more than 7,000 credit unions in the country with nearly 100 million members. Since credit unions are not-for-profit financial institutions, their focus is serving the financial needs of their members and not making a profit. As a result, once you have applied for membership and joined a credit union, it may be easier to get a lower interest rate with fewer fees than found at a bank when procuring a loan. However, like a bank, you will still need to prove your credit worthiness and that you can repay the loan, or have someone co-sign for it.
Unlike banks, credit unions are not protected by the FDIC. However, they are covered by the National Credit Union Share Insurance Fund (NCUSIF), which provides federal and most state-chartered credit union members with up to $250,000 of insurance per individual depositor, per federally insured credit union.
The Small Business Association (SBA) has a variety of business loans, as well as information to help entrepreneurs get started. Founded in 1953, they have provided vital business information to scores of entrepreneurs and “millions of loans, loan guarantees, contracts, counseling sessions and other forms of assistance to small businesses.” The 7(a) Loan Program, has become the most popular of their various loans offered. Visit the SBA at www.sba.gov, or www.sba.gov/loanprograms to go directly to their loan information.
Lenders look for borrowers exhibiting the four Cs of credit:
1. Character: What’s your reputation and background?
2. Capacity or cash flow: Do you have sufficient cash flow to repay principal and interest?
3. Capital: Does your business have enough capital to keep going if you can’t pay the debt from earnings?
4. Collateral: Do you own something valuable the banker can take if you can’t pay the loan back? Hint: Don’t put up your home as collateral.
Title 26 of the Federal Code, also referred to as the Internal Revenue Code, is made up of 20 volumes and is nearly 17,000 pages long. It includes laws covering income taxes, payroll taxes, gift taxes, estate taxes, and excise taxes. Most states have their own tax regulations covering similar taxes and tack on rules and regulations covering items like workers’ compensation insurance and sales taxes. In addition, agencies such as the Social Security Administration and the Equal Employment Opportunity Commission issue their own pamphlets regulating employers. Employer compliance with the myriad of rules and regulations is a daunting task but one that cannot be ignored. A properly established and organized business can cope with the government bureaucracy fairly easily if it understands the basic rules and establishes internal procedures for following those rules.
The first task in setting up your own contracting business is to decide exactly what form, in legal terms, you want your business to be. This legal structure largely determines how much risk the owner takes on and how the government will treat his income. As an entrepreneur you should consult with your lawyer and accountant when deciding which form of business to use, and when consulting with these professionals, be sure to disclose all of your family assets and income, because these factors may influence their recommendations. The choices that business owners have when forming a new company follow:
1. Sole proprietor. This form of business has no separate structure from its owner. Even though the sole proprietor may register a trade name like “Jane’s Drywall Service,” all assets, debts, tax liabilities, and risks belong to Jane. Sole proprietorship has several disadvantages. It may be harder to obtain financing, and you will have unlimited liability in the event the business is sued. This is the simplest form of business and is reserved for the individual entrepreneur. The advantages of being a sole proprietor are being able to make all of the business