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Type
of Funding |
Special
Requirements |
Exit
Strategy |
BANKS
(including SBA loans)
From a few
thousand dollars to several million
Established
companies only
SEE article below
on hard money loans
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Banks offer a wide range of
funding: short and long term small business loans, SBA loans,
lease lines, "sweep accounts", credit cards, accounts
receivable, etc.
Note: From time to time there are
loan programs for minorities that require less longevity and
security.
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Financing is almost always doubly
secured and guaranteed by the principals. Even company credit
cards are guaranteed by the principals.
This is the most regulated of the
lenders. Ratios must meet their requirements; paperwork must be
outstanding.
Some SBA programs, such as the
MicroLoan program, have very different requirements.
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Pay off the loan in a specified
period of time. Even lines of credit typically need to have a zero
balance at least once a year.
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PRIVATE
INVESTORS
("ANGELS")
From a few
thousand dollars to a million
Pre-start up and
Start-up companies
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Very diverse. Aunt Hennie may
donate her empty garage for the business; a retired business
person may invest $100,000; a major customer may advance $500,000
against the first year's orders; the previous owner may take back
a $250,000 Note payable over 15 years.
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This is the least regulated
group. Each deal is negotiated separately. Being able to give the
Angel what he wants (e.g., status, participation, retirement
income, etc.) is key to striking the right deal.
When approaching individuals,
make sure you understand the investment laws of your state,
especially those that quantify "sophisticated
investors." There
are a lot of scams involving Angels, so be wary of
strangers.
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Angels usually want to make a
profit when the first major investor comes in. At times the profit
may be deferred until the second round of financing, or even until
the IPO.
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VENTURE
CAPITAL
From $1 million
to several million
A few venture
capital companies work with start-ups; most require a track record
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There are several thousand
venture capital firms, offering a wide range of financing options.
Locating the one that is best for any given company is a real
talent. Some venture firms are geographically oriented; some are
industry specific; some want only second tier financing. NO
VENTURE CAPITAL FIRM WILL DO IT ALL.
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The ability to provide a high
return in a relatively short period of time is the single most
important characteristic of a venture deal. A 3 to 10 times Return
on Investment in 3-5 years is not unusual.
More than any other type of
financing, the venture capitalist wants a strong management team,
and some of them need direct experience in the industry at hand.
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There are a lot of choices. Many
venture capital firms prefer investing in companies that are
potential buyout or IPO candidates.
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EQUIPMENT
LEASING COMPANY
From a $5,000
computer to millions of dollars in sophisticated equipment.
While a company
need not be established to apply to an equipment leasing company,
the better established it is, the better the terms will be. It is
a rare company that does not approach a leasing company as soon as
it is able -- converting purchased equipment to a lease line
provides the young company with more operating capital than it
could have acquired otherwise.
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Equipment leasing companies are
as sophisticated as any company needs them to be. They can handle
virtually any size project, whether the equipment is new or used.
Some specialize in particular industries or particular geographic
areas.
Leasing may or may not show as
debt on the company's books, depending on how it is structured.
Look to your accountant or banker
for reference to a good leasing company.
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Leasing companies are generally
less regulated than banks, and therefore have more flexibility in
their dealings.
In dealing with leasing
companies, it decidedly helps to make a strong impression -- the
flexibility in their terms make it imperative to put them on your
side of the table.
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Make all payments on time, with a
possible buy-out of equipment at the end of the lease term,
whether or not the company originally purchased it.
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GOVERNMENT
PROGRAMS
Local, state and
national programs abound, including the well-known SBA programs.
Funding
availability varies widely from year to year. Some monies may be
business grants; some are loans; some are investments; some are
tax incentives.
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The SBA is probably the
best-known government program, but there are hundreds more. There
are minority programs, science programs and business incubator
programs. There are whole books just on government programs -- far
more than we can touch upon here.
As the economy ebbs and flows,
governments tend to get more creative in finding ways of
attracting desirable businesses, and tax incentives become a
driving force in generating business.
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While there are a lot of
programs, there isn't a lot of money in most of them. Often the
money is "soft" money (e.g., tax incentives). Finding a
program that is applicable to your business, and genuinely helpful
financially, can be a real challenge.
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Varies widely. Some require
repayment, and some do not.
At the moment, the best bet for
business grants is in the development of security products,
including airport security, building security, postal security,
etc. Anything having to do with voice recognition or other
sophisticated recognition or security would be a shoo-in for
business grants.
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